LONDON: Sterling hovered close to a two-and-a-half month high against the dollar on Tuesday ahead of inflation data that may add to expectations the Bank of England will hold off from more easing for now.
Traders said sterling was also lifted in thin trade by end-of-year demand to buy the currency from companies looking to hedge and from central banks.
The pound was up 0.3 percent at $1.6210, having touched $1.6218 in Asian trade, matching a high hit on Oct. 5. More gains could take it towards the September peak of $1.6310.
UK inflation data at 0930 GMT is expected to show annual growth in the UK consumer price index dipping to 2.6 percent from 2.7 percent, though some analysts warned there was a risk of a higher number.
Slightly stronger UK inflation data may add to expectations that the BoE will not opt for more quantitative easing for the time being, which could lift the pound.
Analysts at ING forecast the annual CPI growth rate to rise to 2.8 percent, which they said could see the pound "test trend channel resistance at $1.6250".
Sterling was also helped against the dollar after last week's monetary easing in the United States and by uncertainty over whether US politicians will reach a deal to avoid the "fiscal cliff" of steep tax hikes and spending cuts.
But analysts and traders said volumes were very thin, which could lead to exaggerated moves.
"Sterling's rise is mainly related to the dollar's decline coming into the end of the year," said Glenn Uniacke, a dealer at Moneycorp.
The euro was down 0.2 percent at 81.18 pence, off Monday's near two-month high of 81.55 pence.
Investors will look to Bank of England policy meeting minutes on Wednesday and retail sales data on Thursday for clues on the chances of UK policymakers authorising more bond buying.
Quantitative easing is usually negative for a currency as it increases its supply.
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