LONDON, July 4 Reuters Sterling steadied on Tuesday as traders waited for service sector data due on Wednesday and pondered whether any positive impact from expected higher interest rates on the British currency has run its course.

In trading thinned by a bank holiday in the U.S., sterling edged 0.08 higher against the dollar at 1.2701 by 0930 GMT, 1.2 below the 14month high it touched against the dollar last month.

Against the euro , the pound rose 0.16 to 85.84 pence, moving towards a 10month high touched against the single currency last month.

Amid fears that more expected rate hikes by the Bank of England BoE could slow the British economy further, traders are awaiting PMI service data due on Wednesday to gauge business sentiment.

While a modest uptick in yesterdays manufacturing PMI may have moderated the realeconomy headwind, the key variable for UK macro activity remains services sentiment, said Jeremy Stretch, head of G10 FX strategy at CIBC.

Any signs of a correction in tomorrows final services PMI … risks dragging on sterling sentiment and positioning, Stretch said.

A survey showed on Monday that the pace of decline in Britain39;s manufacturing sector steepened in June and optimism faded despite weakening price pressures.

The SP GlobalCIPS UK Manufacturing Purchasing Managers39; Index PMI fell to 46.5 from 47.1 in May, its lowest reading this year and one of the weakest since the 200809 financial crisis, but was revised up from an earlier preliminary…