File picture: Reuters

London - The euro rose against the pound for the first time in five sessions on Monday, bolstered by strong euro zone factory data and a weaker-than-expected manufacturing activity report from Britain.

But gains in the euro were being used by some traders to make fresh bets against the currency, with slowing inflation in the bloc having increased the chance of policy loosening from the European Central Bank in the coming week.

Markit's final Eurozone Manufacturing Purchasing Managers' Index rose to 54.0 last month, pipping an earlier flash reading of 53.9 and comfortably ahead of December's 52.7.

The last time it was higher was in May 2011.

But the UK January manufacturing PMI reading of 56.7 disappointed, falling short of expectations of 57 and slipping from the previous month's 57.3.

That saw some pare expectations of near-term rate tightening by the Bank of England.

The euro rose 0.7 percent to 82.61 pence, staying clear of a one-year low of 81.68 pence struck on January 22.

The euro fell on Friday after data showed euro zone inflation slowed to 0.7 percent year-on-year in January, much lower than the ECB's target of just under 2 percent.

Against the dollar, sterling was down 0.5 percent at $1.6360 , trading at its lowest since mid-January.

“The pound has made a poor start to trading after this morning's UK data missed expectations,” said Nawaz Ali, analyst at Western Union.

“The week is ahead is packed with more event risk including several interest rate decisions and key US jobs data.”

Traders are especially looking towards the ECB's policy meeting on Thursday, with the inflation figures having fuelled speculation over a possible rate cut.

“The euro is likely to trade heavy into the meeting and any further easing measures should see euro downside momentum accelerate, particularly against the dollar and the pound,” said BNP Paribas said in a morning note.

“We continue to watch euro/sterling for possible shorts.” - Reuters