LONDON: Sterling rose against the dollar on Monday, boosted by expectations that the Federal Reserve will this week emphasise that U.S. interest rates are likely to stay lower for longer.
The pound lagged the euro, which got a lift from European Central Bank stress tests that found smaller-than-expected capital requirements among the region's banks, lifting some of the economic gloom surrounding the euro zone.
The single currency traded flat at 78.755 pence, barely reacting to a below-expectations Ifo business sentiment survey from Germany.
Sterling was up 0.2 percent at $1.6115, building on Friday's gains made after data showed the UK economy grew at a healthy pace in the third quarter.
"I am not expecting (Fed chair) Janet Yellen to appear hawkish, enhancing the chances of sterling benefiting from risk appetite," said Jameel Ahmad, chief market analyst at FXTM.
"I see more potential in this pair advancing to $1.61 - $1.62, than I do in the pair falling to $1.59."
The Federal Reserve is widely expected to end its asset purchase programme at this week's policy meeting. It is also expected to keep its key policy language unchanged in its statement, with the phrase "a considerable amount of time" being retained with respect to the timing of a rate rise.
By comparison, sterling money markets are pricing in a first interest rate rise by the Bank of England around the middle of next year, potentially the first post-crisis hike by any big central bank.
But there is a degree of uncertainty surrounding the strength of Britain's economic recovery and, by extension, the timing of the BoE's first rate hike, with political risk also increasingly a factor for investors.
"The moderate wage growth in UK labour market and the disinflationary pressures sustain a longer period of loose monetary policy in the UK," said Peter Rosenstreich, head of market strategy at Swissquote.
"...We suspect that the recent strength in sterling will not develop into a sizeable bullish reversal pattern."
Analysts said the European Commission's proposal to raise Britain's contribution to the EU budget by 2.1 billion euros - due to the relative strength of the British economy - was also likely to cloud sentiment and push up the risk premium for buying the pound.
Prime Minister David Cameron could come under pressure to move towards a more anti-European platform ahead of next year's general election if his party loses a by-election on Nov 20, called following the defection of a lawmaker from Cameron's Conservative Party to the eurosceptic UKIP.
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