The pound reached the highest level in more than two months against the dollar and gilts rose as US lawmakers remained deadlocked over a plan to raise the debt ceiling, increasing the relative appeal of UK assets.
The pound also strengthened versus the euro, even as economists forecast a report which was due yesterday will show UK factory orders fell in July.
The dollar weakened against most of its major peers as President Barack Obama and Congress remained at odds over plans to raise the US debt limit.
"External factors are driving the pound, namely whether the US will raise its debt ceiling," said You-na Park, a currency strategist at Commerzbank AG in Frankfurt.
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"If we don't see a result in the next few days, then this will continue to weigh on the dollar and the pound will strengthen."
The pound was little changed at $1.6411 (Dh6.03), after reaching $1.6439, the most since June 14. Sterling climbed 0.8 per cent on Tuesday.
It strengthened 0.2 per cent to 88.25 pence per euro yesterday and lost 0.3 per cent to 127.48 yen.
Wednesday's orders gauge, based on a survey of manufacturers conducted by the Confederation of British Industry, probably fell to -3 in July, from a month earlier, according to a Bloomberg survey of 14 economists.
The pound rose on Tuesday after data showed UK gross domestic product rose 0.2 per cent in the second quarter, slowing from the previous three months' 0.5 per cent pace.
That matched the median forecast of 32 economists. "The growth data came in as expected, so we saw some kind of relief that the figure was not that bad, and the pound strengthened," Park said.
"If the US debt issue is solved, then the market focus will shift back to economic data. If we see some more negative data, then this will be more negative for the pound."
UK demand for houses fell for a third month in June as waning consumer confidence and difficulties in getting a mortgage kept potential homebuyers off the market, the National Association of Estate Agents said.