LONDON: Sterling hit a 3-1/2 month high against the dollar on Wednesday after Bank of England policymakers nudged the bar higher for more monetary easing, while it advanced on the euro after the European Central Bank injected a huge amount of cheap funds.
The pound was also supported by month-end rebalancing flows by portfolio investors, which traders say is likely to keep the dollar under pressure against most major currencies. Still, a reported option barrier at $1.60 could check gains.
The pound was up 0.3 percent against the dollar at $1.5945 , having risen as high as $1.5979, its highest level since Nov. 14 and on track for its second straight month of gains.
It advanced in afternoon trade on steady demand from model funds after having moved past reported option barriers at $1.5950 earlier in the session. On the downside, near-term support was now at its 200-day moving average of $1.5901.
The latest gains came after Bank of England policymakers told lawmakers that they will be guided by upcoming data on whether to print more money or not.
"By and large, I don't think there's any hard and fast expectation that we're inevitably going to do much more," central bank Governor Mervyn King told parliament's Treasury Committee.
His deputy Paul Tucker said the outlook for the UK economy remained highly uncertain with upside risks to inflation from wages and oil.
Earlier in the day BOE data showed UK mortgage approvals for January rising much more than expected while month-on-month M4 money supply rose 1.6 percent. UK data of late has been better than expected, adding to expectations that the economy might not need another dose of monetary easing.
"We expect the dollar to remain soft and hence cable can rise to $1.60 in the near term," said Chris Turner, head of FX strategy at ING, referring to sterling/dollar. "Those comments from the BOE have helped and with cable breaking above the $1.59 level, it could move higher."
US Federal Reserve Chairman Ben Bernanke told a House of Representative committee that the US economy was uneven and reiterated he expects a highly accommodative monetary policy stance at least until late 2014.
That comes despite some improvement in US data including a pick-up in the pace of business activity in the US Midwest.
ECB CASH INJECTION
While expectations of more monetary stimulus from the BOE have been curtailed, the European Central Bank's allotment of 530 billion euros to banks saw the common currency lose ground against the British pound.
The euro was down 0.7 percent against sterling at 84.10 pence, and moving further away from its 100-day moving average at 84.66 pence. It had struck a 2-1/2 month high of 85.06 pence on Friday and traders cited stops at 84.00/05 pence.
Last week's BoE minutes, which saw some policymakers voting for more easing, had propelled the euro above its recent range that had seen it trapped below the 84 pence level.
"That move was an overreaction and we expect euro/sterling to fall towards the 83 pence area in the coming days," said Richard Driver, currency analyst at Caxton FX.
Analysts said the ECB's fresh injection of 3-year money is expected to bolster demand for currencies perceived to be risky, including sterling, at the expense of the euro.
The pound has also been supported by safe-haven flows into the UK gilt market, at a time when investors have cut exposure to euro zone markets, especially peripheral bonds.
Traders said sterling was benefiting from month-end hedging flows after stock markets globally had a good month. Citi's hedge balancing model anticipated net dollar selling this month-end against all G-10 currencies except the yen.
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