LONDON, March 5 (Reuters) - The pound traded listlessly on Tuesday as currency markets remained sluggish, with sterling traders looking towards Wednesday's spring budget as a potential catalyst for volatility.

Sterling was last up 0.07% at $1.2682, sticking to the $1.28 to $1.25 range it has traded in since November. The euro was also little changed against the pound at 85.55 pence.

The main event for investors in the UK this week is the government's budget in which Finance Minister Jeremy Hunt will do his utmost to cut taxes while avoiding the ire of bond markets, which saw off his predecessor Kwasi Kwarteng in 2022.

"While it is normal for the budget to not induce any real currency volatility, the muscle memory of the (Liz) Truss/Kwarteng horror show could still create a twitch," said Joe Tuckey, head of FX analysis at broker Argentex.

"If the gilt market (British government bonds) gets a sniff of any tax cut pledge being unworkable, we could see sterling trade nervously."

Survey data on Tuesday showed that British companies had their strongest month in February since May last year, suggesting the economy is out of a short recession.

The S&P Global composite Purchasing Managers Index, spanning Britain' services and manufacturing sectors, edged up to 53.0 from 52.9 in January. A reading above 50 indicates that the private sector is growing.

Measures of currency volatility have slumped to two-year lows, with analysts pointing to the fact that global bonds are moving in lock-step, limiting the movements between borrowing costs that typically drive FX markets.

The dollar index, which measures the currency against six major peers, edged very slightly higher to 103.87.

(Reporting by Harry Robertson, editing by Ed Osmond)