LONDON: Sterling was firm at 7-1/2 month peak against a trade-weighted basket of currencies on Thursday, helped by gains against the euro before interest rate decisions from the Bank of England and European Central Bank.
The ECB is expected to pledge to keep monetary policy accommodative to support a nascent recovery.
It is unclear whether the UK central bank will break with tradition under new governor Mark Carney and make a statement on rates if, as expected, it keeps its own policy unchanged.
But the bank's pledge that interest rates will stay low has looked increasingly at odds with an improving UK economic outlook and spreads between 10-year British gilt yields and their German counterparts widened further on Thursday, keeping the pound firm.
The 10-year premium is at a three-year high while the spread between interest-rate sensitive two-year British and German bond yields climbed to a more than two-week high.
Some traders said that if the BoE does issue a statement at 1100 GMT expressing concerns about rising short term rates, sterling could give up some of its gains. The BoE said on Thursday it had no comment on whether it would make a statement later or not.
"Any statement could attempt to clarify its position on forward guidance, given that so far it has little no impact on markets," said Craig Erlam, market analyst at Alpari.
The euro was down 0.1 percent at 84.445 pence, not far from a 3-1/2 month low of 84.26 struck on Wednesday after data showed the UK services sector expanded at its fastest pace in more than six years in August.
Against the dollar, sterling was a bit subdued, trading at $1.5605, having hit its highest in nearly two weeks at $1.5648 on Wednesday. Sterling's trade-weighted index was at 82.3, its highest since Jan. 17.
The ECB will announce its rate decision at 1145 GMT. All 60 economists in a Reuters poll expect it to keep interest rates at 0.5 percent.
Even if the BoE was to try and talk down market rates, any gains for the euro are likely to short-lived with the options market indicating increased demand for euro puts or bets it will weaken further against the pound.
"We continue to be short euro/dollar and euro/sterling," Societe Generale said in note.
Part of the demand for euro downside strike options against the pound stems from the fact that recent UK data has consistently surprised and beaten expectations.
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