LONDON: Sterling rose against the dollar on Monday, buoyed along with other riskier assets after Greece's parliament approved an austerity bill, bringing the country closer to securing a second bailout and avoiding a chaotic default.
Gains were expected to be kept in check, however, with investors wary ahead of a Bank of England inflation report on Wednesday that may give clues on the likelihood of further monetary easing.
The BoE last week pumped another 50 billion pounds into the economy to try to stimulate growth under its quantitative easing (QE) programme. Although the central bank sounded a little less pessimistic about the economy, investors were wary of building bullish bets before Wednesday's report.
"It looks like pressure is on the pound until we get through the Inflation Report on Wednesday morning," said Lee McDarby, head of corporate dealing at Investec Bank.
"It wouldn't be surprising to see more QE from the Bank of England in the months ahead".
Sterling was up 0.4 percent against the dollar at $1.5804 , buoyed by the improved risk appetite that also lifted the euro, riskier currencies and equities.
Doubts remained, however, over whether Greece can cope with more austerity, particularly after violence in Athens overnight.
The pound faced technical resistance at the Feb. 8 high of $1.5929 and the 200-day moving average, currently at $1.5928.
Morgan Stanley analysts told clients that they aimed to sell sterling at higher levels towards $1.5960, with a target of $1.5460.
"Further quantitative easing and large exposures into a weak and uncertain euro zone make us cautious on the outlook for sterling," they said in a note.
Inflation data on Tuesday will also be key and is expected to show a further dip in UK price pressures in January. Lower inflation would make it easier for BoE policymakers to justify further monetary easing as their forecasts have shown prices dropping back sharply from highs hit last year.
The euro was up 0.2 percent at 83.85 pence, edging close to Friday's high of 84.06 pence. Just above there is the late January high of 84.09 pence, which is the euro's strongest since late December.
"Sterling is very much in the hands of the euro zone crisis," said John Hydeskov, chief analyst at Danske Bank, adding that optimism in the wake of the Greece vote was causing the pound to underperform the euro.
"We still expect there will be more QE from the Bank of England and the inflation report will show that."
Investec's McDarby said sterling could fall to around 1.18 euros, equivalent to a euro/sterling rate around 84.75 pence, within the next week if the pound remained under selling pressure.
Data from the Commodity Futures Trading Commission showed speculators increased bearish bets on sterling in the week to Feb. 7, which analysts said was probably due to wariness about the risk of more QE before last Thursday's policy decision. Net short euro positions were pared back though they remained at high levels.
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