LONDON: Sterling rose against the dollar on Friday, trading within sight of a five-week high as speculation that a Greek debt swap deal would be reached over the weekend and slightly weaker-than-expected US GDP data weighed on the greenback.
Market talk of a expected deal between Greece and its private creditors that would avoid a messy default helped push the euro higher against the pound, tracking a rise in euro/dollar.
Traders said demand for euro against sterling at the 4pm fix, when the Bank of England sets a reference rate, also contributed to euro strength against the UK currency.
Data showed the US economy expanded by 2.8 percent in the fourth quarter of 2011, its fastest rate in one and half years, but slightly slower than a consensus estimate of 3 percent.
Strong rebuilding of stocks by businesses and a slower pace of spending on capital goods hinted at softer growth in coming months.
Sterling was last up 0.1 percent on the day at $1.5699, having earlier hit a session high of $1.5730. The UK currency was on track for its second straight week of gains after hitting a five-week high of $1.5735 on Thursday.
Traders said $1.5736, around the 100-week moving average, was providing strong upside resistance and a break above that level would expose the December 21 high of $1.5775.
"[The data] reinforces the weakness of the dollar and reinforces what the Fed is doing," said Kathleen Brooks, research director at Forex.com.
"It was boosted by inventory build and when you've got such big inventory build, usually what that means is production in the next quarter could be fairly weak."
The dollar has been under broad pressure since a more dovish-than-expected Federal Reserve pledged to keep rates at ultra-low levels for at least another two years earlier this week. Traders reported good demand to buy the pound on dips.
"We feel there is some value in long GBP but not at these levels," said a London-based sales trader. "Our traders note small stops through to $1.5610 and feel this affords better levels to buy."
The euro hit a session high of 83.95 pence against the pound, close to its highest level in four weeks, after a Greek government official said Athens was aiming to a deal in principle by Sunday evening.
The single currency was also supported after European Union economic affairs chief Ollie Rehn said a deal on reducing Greece's private sector debt was "imminent" and could be completed by next week.
But the euro remains hampered by increasing concerns that Portugal may be heading towards a second bailout and possible debt writedowns.
UK PMIS EYED
Sterling has been unable to take full advantage of euro zone troubles due to expectations the Bank of England will need to increase its asset purchase programme as early as next month to support the UK's flagging economy.
Those concerns were heightened after data on Wednesday showed the UK economy contracted by 0.2 percent in the fourth quarter of 2011, putting it on the brink of recession.
Market players are now looking ahead to next week's PMI data, which will indicate the health of the manufacturing, construction and services sectors.
"People have been looking at [recent PMI data] and saying that the chances are that the UK will manage to avoid recession, so clearly the next PMI could be pivotal in either cementing or dismissing that view," said Jane Foley, senior currency strategist at Rabobank.
Foley said positive data could scale back QE expectations and support the pound.
In an interview with Reuters on Friday Bank of England policymaker David Miles said he was more confident of a sharp fall in inflation this year than he had been three months ago, but that his final decision on whether to do more quantitative easing would hinge on fresh forecasts.
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