LONDON: Sterling rose to fresh multi-month highs on a trade-weighted basis on Monday as investors continued to view the UK currency as a safer bet than the ailing euro and a softening US dollar.
But analysts said the pound's gains were becoming stretched, given the UK economy has slipped into another recession which is likely to prevent the Bank of England from tightening monetary policy for the foreseeable future.
Sterling rose to an eight-month high of $1.6304 against the dollar which itself skidded to a two-month low versus a basket of currencies as weak US growth data on Friday reinforced expectations of dovish US monetary policy.
The pound was last down 0.1 percent on the day $1.6247.
"It makes sense that the pound has performed relatively well of late given the shift in interest rate expectations, but it appears to be overshooting now, particularly as the UK is still in recession," said Lee Hardman, currency strategist at BTM-UFJ.
A less dovish tone in April's BoE policy minutes reduced speculation of further increases in the bank's asset purchase programme which currently stands at 325 billion pounds.
The euro slipped to a 22-month low of 81.23 pence with worries over euro zone debt markets, notably Spain, keeping investors on edge over the common currency.
Sterling's next target against the euro is the June 2010 high of 80.67 pence. Beyond there would take it to levels not seen since the aftermath of the Lehman Brothers' collapse in autumn 2008.
With the euro accounting for more than half of sterling's trade-weighted index, Bank of England data showed the pound trading at a fresh 32-month trade-weighted high of 83.6.
PMIS IN FOCUS
An absence of UK economic data on Monday left the focus on economic sentiment surveys set to be released later in the week.
Manufacturing PMI data for April, due to be released at 0830 GMT on Tuesday, is forecast to slip from the previous month but remain in expansionary territory and reinforce the view that last week's UK GDP figures could be revised higher.
"A fair amount of reports this year suggest there are clear green shoots in manufacturing. A decent PMI number tomorrow against the backdrop of the GDP report last week does have the capacity to move the pound higher," said Jane Foley, senior currency strategist at Rabobank.
Latest IMM positioning data reflected the view bullish view on sterling as speculators flipped to a small long position.
"Sterling bears have capitulated but it will take some good news to generate a build-up of long positions, and pave the way for EUR/GBP to push on towards 80 pence," said Societe Generale in a note.
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