* Sterling rises on softer dollar and improved risk appetite

* Pound rebounds from Monday low; hits two-week high versus

euro

* Focus shifts to UK outlook and GDP data

By Stefano Rebaudo

June 9 (Reuters) - Sterling rose against the dollar and hit

a two-week high versus the euro on Tuesday as risk appetite

improved and the U.S. currency eased on hopes for a Middle East

peace deal.

The pound is seen as a risk-sensitive currency, given

Britain's reliance on global trade and capital flows.

The dollar edged down as investors weighed hopes for a peace

deal and the U.S. rate outlook, while global stocks rallied as

investors bought the latest dip in tech stocks.

The pound fell sharply on Friday, largely due to dollar

strength, as expectations for higher U.S. rates and safe-haven

demand increased amid escalating Middle East violence.

On Tuesday, sterling rose 0.36% to $1.3385, after

hitting $1.33065 on Monday, its lowest since May 18.

Some market participants said focus is shifting away from

political concerns, with sentiment towards the UK economy

improving.

"Whilst investors have remained focused on the UK's fragile

public finances, the second part of the 'dual deficit'

narrative, the balance of payments, has been largely

overlooked," Kamal Sharma, forex strategist at BofA, said.

"A higher capital-intensive mix of foreign direct investment

inflows should be seen as a medium-term positive for the pound

valuation trends," he added, citing AI-linked inflows alongside

financial services and biotech investment.

The June 18 Makerfield by-election could revive concerns

about fiscal policy if Greater Manchester Mayor Andy Burnham

returns to Westminster, potentially paving the way for a

leadership challenge to Prime Minister Keir Starmer later this

year.

Investors will closely watch GDP data on Friday for clues on

the economic outlook.

"A notable upward revision in the PMI business indices last

week suggests that the initial confidence drop was overstated

and that the UK economy is more resilient to the Middle East

events than first feared," Enrique Díaz-Alvarez, chief

economist at global financial services firm Ebury, said.

The S&P Global Purchasing Managers' Index for Britain's

‌services sector fell to 49.3, though the reading was stronger

than the flash estimate of 47.9.

Bank of England policymaker Megan Greene said last week she

saw a growing case for raising interest rates as the Iran war

drags on and increases the risk of broader price rises across

the economy.

The euro was down 0.13% to 86.33 pence, after

hitting 86.27 pence, its lowest since May 26.