LONDON: Sterling was hovering near a two-year high against the euro on Monday after two weeks when increasingly divergent interest rate expectations had made it one of the main buys against a weakening single currency.
The strength of Britain's economic recovery over the past months has bolstered expectations that the Bank of England will be the first major central bank to raise interest rates since the financial crisis.
But gains over the past week have been assisted by a move higher for the dollar against the euro, from which sterling also tends to benefit.
The outlook for both U.S. and British monetary policy contrasts sharply with that for the euro zone, where inflation numbers this week may put renewed pressure on officials to pump more euros into a moribund economy.
"The market has shifted its focus to the euro, and the euro is losing ground in a fairly steady fashion," said Neil Mellor, a currency strategist at the Bank of New York Mellon.
"Sterling is the obvious play against it."
Data on Friday showed UK gross domestic product expanded by 0.8 percent in the April-June period, the same strong pace as in the first three months of the year. That followed Thursday's forecast from the International Monetary Fund that Britain will easily be the fastest-growing advanced economy in 2014.
But data from the euro zone has weighed on the euro, with business morale in the monetary union's biggest economy, Germany, at its lowest in nine months. Worries over sanctions on Russia - the European Union's main supplier of energy - have also hurt euro zone financial markets.
In early trade in Europe sterling was flat against the euro at 79.135 pence, just off an almost two-year high of 78.74 pence hit last week.
The pound has had a much rougher time against the strengthening dollar, a two-cent fall in less than 10 days calling into question its almost 15 percent surge over the past year. It was flat at $1.6977 on Monday..
The week's main events are a two-day meeting of the U.S. Federal Reserve's rate-setting committee, the Federal Open Market Committee (FOMC), due to start on Tuesday, as well as U.S. jobs numbers on Friday.
Traders will also be looking at UK mortgage data on Tuesday for signs that Britain's economic recovery is on track.
"Focus in the very near term (will) be on mortgage data on Tuesday," analysts from U.S. bank Citi said in a morning note. "Sterling's recent underperformance may continue versus the dollar, however, going into U.S. data and the Fed."
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