LONDON: Sterling edged up against the dollar on Tuesday, tracking a slight rise in the euro against the US currency amid cautious optimism of better economic data from Germany later in the session.
The pound was steady against the euro however, and strategists said sterling could struggle against the shared currency if the German ZEW survey shows economic sentiment in the euro zone's largest economy is better than expected.
"We might get some rare positive news which would provide some support to the euro and countries exposed to the euro, so sterling might gain (against the dollar)," said Ian Stannard, head of European FX strategy at Morgan Stanley.
"It's bit of a mixed picture. We could see euro/sterling move higher with a stronger euro but sterling holding its ground against a weaker dollar."
Sterling rose 0.1 percent on the day to $1.6084, with reported demand from Middle East investors. Technical charts showed support for the pound around the 55- and 50-day moving averages at $1.6036 and $1.6023.
The euro was close to flat on the day at 80.50 pence, off a near three-week low of 80.35 pence hit on Monday after market players were unsettled by Italian prime minister Mario Monti's surprise decision to resign early.
Concerns about political uncertainty in Italy were expected to limit both sterling and euro gains against the highly liquid dollar, which is considered a safe haven currency by investors and tends to rally in times of market tension.
Morgan Stanley's Stannard said the pound could also come under pressure when the officials from the UK's Office of Budgetary Responsibility gives evidence to a parliamentary committee on the government's mid-year budget statement later in the session.
Finance minister George Osborne downgraded growth forecasts and said the country will miss debt-cutting goals in his Autumn Statement last week, raising concerns the UK will lose its prized AAA credit rating.
A survey showing UK house prices fell faster than expected in November added to concerns about the economy, although with no other domestic data scheduled for Tuesday the pound was expected to take its lead from developments in the euro zone.
KING'S WARNING
Analysts said a speech from Bank of England governor Mervyn King in New York on Monday, in which he warned that too many countries were trying to weaken their currencies, was unlikely to impact the price of sterling.
The speech did however highlight the BoE's concern that the UK will struggle to boost exports while the pound remains relatively strong.
Trade-weighted sterling was last at 83.9, according to BoE data, within reach of the peak of 84.7 hit in September. A rise above that level would take the index to its highest since November 2008.
"This is not meant to be indicative of any kind of policy towards sterling," said Steve Barrow, head of G10 currency research at Standard Bank.
"All King is recognising is the possibility this is continuing to grow because the world if not recovering as many people thought it would. If monetary policy is very stimulative then countries may be tempted if they need growth to steal it from someone else through the exchange rate."
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