The pound moved higher against the euro on Tuesday (4 January) while the dollar reached its highest level in over three weeks, as 2017 trading started in earnest.

Having struggled in the shortened post-Christmas week, sterling climbed above €1.18 (£1.00, $1.23) for the first time in a week and a half, after receiving a much-needed boost by a better-than-expected report on the UK manufacturing sector.

By early afternoon, the UK currency was trading at 0.74% higher against the euro at €1.1820 and was broadly flat against the dollar, exchanging at $1.2275.

Data released earlier in the day, showed Britain's manufacturing sector expanded at the fastest pace in two-and-a-half years in December. The Markit PMI for the sector rose from 53.4 in November to 56.1 last month, marking the fifth consecutive month of expansion and exceeding analysts' expectations for a 53.3 reading.

"The pound is sharply higher against the euro today, helped by a much stronger than expected rise in UK manufacturing activity last month," said Chris Saint, senior analyst at Hargreaves Lansdown. "Markets will now be keen to see if Thursday's UK services PMI number also surprises positively."

However, FXTM research analyst Lukman Otunuga suggested the pound remained under severe pressure. "The fact that sterling bears maintained some dominance following December's impressive UK manufacturing PMI continues to highlight how the Brexit woes have infected the pound," he said.

"Sterling ended 2016 as a loser among other major currencies with the negative Brexit momentum potentially capping upside gains this quarter. With uncertainty remaining the engine behind Sterling losses, further weakness should be expected as anxiety heightens ahead of the EU exit negotiations."

Elsewhere, the dollar index – which measures the strength of the currency against a basket of major currencies – recorded its biggest increase in three weeks, leaving it only 1% short of last month's 14-year-high.

The US currency was up by 0.59% and 0.69% against the yen and the Swiss franc respectively, fetching ¥118.24 and CHF1.0306, and rose by 0.71% against the euro to trade at 0.9629 euro cents. The greenback, however, was largely flat against its Canadian counterpart, trading at CAD$1.3449.