LONDON, Oct 10 (Reuters) - Sterling rose on Tuesday ahead of British industry and trade data that will set the tone for the Bank of England to decide whether to raise interest rates for the first time in 10 years.
The pound rose 0.2 percent to $1.3167 -- recovering slightly from the 2.5 percent it lost last week -- and was the best performing currency at the start of the new week.
Official industrial output, construction, and trade data for Britain will be released later on Tuesday. Economists say it would take a big departure from their forecasts for steady-if-slow growth in the August figures to prompt the BoE to change course.
Sterling rose strongly on Monday after the Office for National Statistics (ONS) said British labour costs were growing more strongly than previously announced.
"The short sterling market has moved to price in an even greater probability of a BoE hike on the back of the ONS report," said Credit Agricole in a note. "Money markets are already pricing in more than 75 percent chance of a hike at the November inflation report."
Concerns about turmoil within the governing Conservative party have subsided after British Prime Minister Theresa May vowed to ward off challenges to her leadership and signalled the possibility of a cabinet reshuffle.
But some strategists believe that markets are not taking into account political risks and focusing too much on possible rate hikes.
"The material deterioration in the political background has been largely ignored as monetary policy has dominated," said Adam Cole, the head of FX Strategy at RBC. He recommended selling into the sterling rally, given the high possibility of a "GBP-negative events." "Markets have wrongly extrapolated a November hike into a sustained tightening cycle," Cole said. Against the euro, sterling climbed half a percent to 89.34 pence. (Additional reporting by Jemima Kelly; Editing by Jon Boyle)