LONDON: Sterling rose for a third straight day against the dollar on Friday, pulling away from a recent 33-month low on comments by Bank of England chief Mervyn King that its decline had gone far enough.
But it could struggle to make further headway, traders said, given persistent concerns about the British economy and expectations the BoE may have to resort to more asset purchases to support the economy.
In contrast, the US economy is showing signs of a sustained recovery, adding to speculation that the Federal Reserve may halt its quantitative easing programme sooner than many expect.
The pound was up 0.4 percent against the dollar at $1.5135, building on the 1.2 percent gains of the last two trading sessions. Resistance is expected around the March 5 high of $1.52 with offers cited above that.
The euro was down 0.1 percent on the day at 86.10 pence, off a two-week high of 87.93 pence hit on Tuesday, and not far from a one-month low of 85.745 pence.
King said on Thursday that the central bank was not seeking any further fall in the level of sterling which now appeared to be "properly valued".
That was a turnaround from his previous stance of advocating a weaker currency to rebalance the economy and achieve growth by boosting exports.
Analysts said his comments were aimed at stemming recent declines in the pound given that a sharp drop would generate more price pressures and burden consumers already struggling due to falling wages and large government spending cuts.
"Since 2007 there has been a 25 percent depreciation in the pound and that has not really helped export competitiveness," said Peter Kinsella, currency strategist at Commerzbank.
"Further weakness will only generate more (imported) inflation. What King is trying to do is stem more sterling weakness. But sterling/dollar remains a sell on rallies given the different growth outlooks between the US and the UK."
Earlier this week, weak manufacturing output figures added to a string of sluggish data that has raised concerns the British economy could be heading for a third recession in four years.
Against that backdrop, the BoE might opt for more monetary easing to stimulate growth via its programme of asset purchases, which is generally negative for the currency as it involves the central bank flooding the market with sterling.
Analysts said investors would also be wary of taking large positions before finance minister George Osborne presents his budget next week. Speculation is mounting that Osborne will announce a review of the BoE's remit and give it more leeway on inflation targeting, allowing scope for a further easing of monetary policy.
All this is likely to drive the pound, which has lost 7 percent against the dollar so far this year and 5.6 percent against the euro, even lower.
"The current sterling rally will not represent a trend change," Morgan Stanley said in a morning note. "...Sterling/dollar near $1.54 represents a selling opportunity."
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