LONDON: Sterling hit a two-month high against the dollar on Tuesday, tracking the euro's gains against the US currency on hopes Greece can reach a debt swap deal with its creditors by the end of the week.
Traders said the pound was also helped by month-end dollar selling, though this was partly offset by reported month-end buying of euros against sterling.
Greek Prime Minister Lucas Papademos said negotiators had made significant progress and Greece and its private creditors could reach a definitive deal by the end of the week.
Optimism that Greece may avoid a chaotic default buoyed sentiment towards the euro and broadly lifted riskier assets and currencies, including sterling.
The pound was last up 0.4 percent $1.5766, having hit a two-month high of $1.5776, just shy of the Nov. 30 high of $1.5780. A move beyond there would open the door to a test of $1.5800, traders said
"There's not very much news coming from the UK market at the moment, I think really it's all about what we're seeing in Europe," said Sara Yates, FX strategist at Barclays.
She said events in Europe were lending some support to sterling, but added: "I don't expect sterling to push much higher from here because we are expecting the [Bank of England's Monetary Policy Committee] to imminently loosen (policy)."
Sentiment towards the dollar remained bearish after the Federal Reserve said last week that it intended to keep interest rates at record lows until 2014.
The pound fell against a firmer euro, which was up 0.1 percent at 83.67 pence, staying within sight of its recent high of 84.09 pence.
The market is likely to take direction from the Greek debt talks, though concerns about debt problems in Portugal, where yields on government debt hit new highs yesterday, may weigh on the single currency.
DATA EYED, QE LIKELY
Sterling could come under pressure later this week when purchasing managers' surveys on manufacturing, construction and services could give further evidence of the fragility of the UK economy and add to expectations of further monetary policy easing.
Data on Tuesday showed consumer confidence spiked to a seven-month high in January to -29, beating a consensus estimate of -31. But traders said the focus was on the PMI data.
A Reuters poll forecast an improvement in the UK January manufacturing PMI, but falls in construction and services PMIs.
Many in the market expect the Bank of England will announce a further round of quantitative easing under its asset purchasing programme in February, which would weigh on the pound.
Mortgage lending, consumer credit and M4 money supply data are due for release at 0930 GMT. They are expected to show lending in the UK remains subdued but analysts do not expect the numbers to have much impact on sterling.
"At this stage the FX market is used to mediocre data releases from the UK so it would take a truly surprising number to move the market," Commerzbank said in a note to clients.
"We have to focus on what is happening in the euro zone rather than the UK these days, with all eyes on events in Greece."
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