LONDON: Sterling rose against a broadly weaker dollar on Monday as the political dispute over the US federal budget and debt ceiling showed little sign of ending.
Analysts said the pound had strong chart support above $1.60, with the dollar under pressure against most liquid currencies including the yen and the euro due to concerns politicians may not reach a deal to avoid a US debt default by an Oct. 17 deadline.
Sterling was up 0.4 percent at $1.6080, but it remained well away from a nine-month high of $1.6260 hit on Tuesday. At that peak, the pound had gained more than 7 percent since early August.
Sterling was also firmer against the euro. The euro was down 0.4 percent at 84.34 pence, off a one-month peak of 84.755 pence touched on Friday.
"The dollar will stay on the defensive until there is some degree of resolution in the US and this has probably put a floor on sterling/dollar at $1.60," said Jeremy Stretch, head of currency strategy at CIBC.
"The underlying story of the UK recovery remains on track ... If and until we get some questioning of the durability of the UK recovery going into the fourth quarter, then sterling will stay relatively well supported."
Purchasing managers' surveys on British manufacturing, services and construction activity last week were strong, continuing to point to an improving economy, but delivered a mixed performance against market expectations.
British data overall has prompted investors to start pricing in a possible Bank of England (BoE) rate hike by the first half of 2015 - well before the central bank's late-2016 timeframe when it expects unemployment to fall to the 7 percent level at which it would start to think about raising rates.
The central bank meets this week and is not expected to spring any surprises given the uptick in economic activity.
"Although business activity has been moderating of late, we expect a trend of further improving growth conditions to remain intact. This makes a case for inflation expectations to remain elevated, which in turn lowers the risk for the BoE to turn more dovish anytime soon," said Manuel Oliveri FX strategist at Credit Agricole.
He added this would help sterling against the dollar.
British government bonds rallied in step with Bunds, pushing yields 2 to 4 basis points lower across the curve. The spread between 10-year gilt and Bunds yields was little changed at 91 basis points.
Trading ranges were narrow with few investors willing to risk positions against an uncertain backdrop of US budget negotiations.
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