LONDON: Sterling hit a one-month high against the dollar on Friday on demand from sovereign investors but gains could be limited by worries about the US budget and risks of more monetary easing in the UK.
Market players said buying by an Asian central bank boosted the pound, but month-end demand for euro/sterling by corporates and some European central banks was likely to limit gains.
The pound rose to $1.6062, its highest level since Nov. 2, but retreated to trade at $1.6028 against the dollar. Near-term resistance was at $1.6056, its 55-day moving average.
Sterling will be swayed by the euro's movements and more broadly by whether lawmakers can strike a deal in the United States to address the fiscal problems facing the world's largest economy.
"The focus is really going to be on euro/dollar as it really drives sterling moves and I will be looking for more comments on the US fiscal cliff," said Nawaz Ali, UK market analyst at Western Union Business Solutions.
The so-called "fiscal cliff", a raft of spending cuts and tax rises due to kick in early next year, threatens to derail US and global growth and is keeping currencies like the euro and sterling under pressure.
House of Representatives Speaker John Boehner said on Thursday that talks on the fiscal problem had made no substantial progress and criticized the President and Democrats for failing to get serious about a final deal.
Along with the euro, the pound typically falls during times of heightened concerns about the global economy. If the United States falls into a recession it could drive investors to more liquid currencies like the dollar and the yen.
The euro was up 0.3 percent against sterling at 81.13 pence, not far from a one-month high of 81.165 hit on Friday.
"We expect euro/sterling to remain within the recent range, the 81.15 pence area should provide decent resistance on the upside, and the recent low of 80.60 pence should provide some support on the downside," analysts at Lloyds said in a note.
Back in the UK, bleak economic data has kept the chances of monetary easing by the Bank of England, or quantitative easing (QE), alive and this is likely to cap any rallies in sterling against the dollar. QE is seen as negative for the pound as it increases its supply.
BoE Governor Mervyn King on Thursday flagged an "exceptionally challenging" environment in the UK economy, a factor likely to boost the case for a weaker pound to stimulate growth.
Strategists said there were a slew of events next week which would provide direction to the pound. Apart from the BoE and European Central Bank meetings on interest rates, the mid-year UK budget update would provide some clarity on the economic outlook.
Traders said these events had the potential to help sterling break the $1.5880-$1.6050 range seen in recent weeks.