The British pound dropped to a one-month low against the U.S. dollar on Tuesday as UK business activity data came in below expectations.

S&P Global's UK composite purchasing managers' index (PMI), which spans both the services and manufacturing sectors, showed services activity growth slowed more than expected this month, while manufacturing companies' business shrank more than forecast.

The pound dropped to as low as 1.2385 against the dollar following the data, the lowest since April 21.

Against the euro it was last down 0.2% at 87.08 pence.

The UK currency largely shrugged off the International Monetary Fund saying on Tuesday that it no longer expects Britain's economy will fall into a recession this year, upgrading forecasts that it published last month.

However, the IMF also warned that the outlook remains subdued.

"Even though on the surface, the news from the IMF is good, that I would have argued was already in the price," said Jane Foley, head of FX strategy at Rabobank.

The pound has been a top performer this year as Britain has managed to dodge a winter recession despite having the highest inflation level in Western Europe in March.

"Positioning on sterling has made it more vulnerable to bad news," Foley said.

"The market has probably gone overboard in terms of buying a bit of sterling back and now it's faced with the reality that yes, data has improved relative to what we thought it was going to be last year, but it's certainly not good."

The pound fell as the U.S. dollar was up 0.1% against a basket of currencies on Tuesday, as investors bet U.S. interest rates would remain higher for longer and ongoing debt ceiling negotiations kept investors on edge.

Investors were also watching testimony by Bank of England Governor Andrew Bailey and other policymakers to the Treasury Select Committee on the bank's decision to raise interest rates this month.

The big focus for investors will be inflation data on Wednesday, which is expected to show UK inflation declined to 8.2% in April from 10.1% in March.


(Reporting by Yoruk Bahceli; Editing by Susan Fenton)