LONDON: Sterling rose from a five-month low against the dollar and pared losses against the euro on Tuesday, overcoming a wobble after Scotland's pro-independence leader Alex Salmond won a final debate before a referendum next month.
Returning after Monday's market holiday in London, traders bought the pound, which has weakened in recent sessions after investors unwound expectations of a Bank of England interest rate hike later this year.
The pound posted its seventh weekly loss against the greenback last week -- a run not seen since the financial crisis of August and September 2008.
Sterling was steady at $1.6580 on Tuesday, having hit a five-month low of $1.6501 late on Monday.
It was also steady against the struggling euro at 79.60 pence, not far from a two-week high of 79.52 pence.
Some uncertainty about the outcome of the Scottish referendum, for which the gap between the "Yes" and "No" camp has narrowed, has pegged the pound back against the euro. But analysts said this weakness was likely to be temporary.
In Monday's TV debate, Salmond relentlessly talked over Alistair Darling, the leader of the anti-independence movement, arguing Scotland would be wealthier, freer and better governed if it became independent.
"Despite Alex Salmond winning the second ...debate..., we expect euro/sterling to stay soft this week," said Chris Turner, head of currency strategy at ING.
"The euro zone inflation and the response from the ECB (European Central Bank) should dominate and send euro/sterling down to 79 pence."
The inflation data is due on Friday. Analysts polled by Reuters expect annual inflation to have slowed to 0.3 percent in August from 0.4 percent in July, falling even further below the ECB's target of just under 2.0 percent.
Late on Friday, in stronger language than he has used in the past, ECB President Mario Draghi said the central bank was prepared to respond with all its "available" tools should inflation drop further.
That was in sharp contrast to the situation in the UK.
Bank of England minutes last Wednesday showed two policymakers unexpectedly voted to start raising interest rates this month, becoming the first to do so in more than three years.
"The obvious divergence between policy direction in the euro zone relative to the U.S. or the UK is becoming more obvious and that will leave the euro as the funding currency of choice going into 2015," said Derek Halpenny, European head of research at Bank of Tokyo-Mitsubishi.
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