By Anirban Nag
LONDON (Reuters) - Sterling hit a two-month high against the dollar on Wednesday after an industry survey provided more evidence of a UK recovery, bolstering the view that interest rates may rise sooner than the Bank of England has indicated.
A Confederation of British Industry survey showed manufacturers' order books were in their best shape in two years in August, boding well for the economy.
That more than offset disappointing public borrowing figures released earlier in the day.
Official data showed a public borrowing deficit of 62 million pounds last month, the first deficit for the month of July - which typically shows a surplus due to tax payments - since 2010. The data confounded a Reuters poll forecast for a 2.45 billion pound surplus.
Sterling rose 0.2 percent against the dollar to $1.5695, having hit a two-month high of $1.5702. Traders cited resistance at its 200-week moving average of $1.5754.
"The borrowing data was not a great number, but in the bigger scheme of things not really terrible," said Craig Erlam, market analyst at Alpari. "Investors are more focused on the better growth numbers and the jobs outlook. So sterling has not shown much of a reaction to a small negative number."
Traders will be cautious about pushing sterling towards $1.5750 before the release of the minutes from the Federal Reserve's most recent policy meeting, due at 1800 GMT.
Confirmation that the Federal Open Market Committee is veering towards slowing its bond-buying programme in September could see U.S. Treasury yields rise and help the dollar but a more cautious approach by the Fed could see the dollar weaken.
The gap between U.S. 10-year Treasuries and British government bond yields has more than halved in recent weeks as investors priced in chances the Bank may have to tighten policy sooner than it has flagged.
Earlier this month, Governor Mark Carney pledged to keep UK interest rates low until unemployment falls to 7 percent, which the central bank sees as unlikely for another three years.
Improving economic conditions have cast doubt on this timetable and helped sterling gain 3 percent against the dollar and around 2.5 percent against the euro so far this month.
Adam Myers, European head of FX strategy at Credit Agricole, said the CBI survey was helping sterling.
"Contrasted against a still-cautious Fed and an ECB with little policy room to manoeuvre, this should maintain a bid for sterling versus both dollar and euro through Friday. As such we recommend investors stay with sterling/dollar longs while selling into yesterday's euro/sterling squeeze."
The euro was down 0.2 percent against the pound at 85.45, with support seen at its August 15 low of 85.05. Traders expect the euro to struggle given the European Central Bank has pledged to keep rates low to support economic recovery.
(Editing by John Stonestreet and Susan Fenton)