LONDON: Sterling edged higher against the euro on Tuesday, and looked set to hold its gains even as investors focused on testimony by Bank of England policymakers that could increase expectations of another round of quantitative easing next month.
Four policymakers including BoE governor Mervyn King will speak in front of a Treasury Select Committee later in the session and are expected to paint a cautious outlook on the UK economy given the risks posed by the euro zone crisis.
Although quantitative easing is often considered negative for a currency, some analysts said their comments were unlikely to knock sterling significantly lower given bets on further monetary easing are already priced in.
"At the margin there's some risk that if they are very dovish, which they probably will be, there may be a knee-jerk reaction in sterling, but most of the news is already in the market," said Adrian Schmidt, currency strategist at Lloyds.
The euro dipped 0.1 percent against the pound to 80.16 pence, hovering just above a near two-week low of 80.11 pence. A break below that level could open the door to a test of the 3-1/2 year low of 79.50 hit last month.
Sterling also edged higher against the dollar to $1.5591, with resistance seen around $1.5662, the 23.6 percent retracement of the early to mid-June rally.
More QE has been seen as increasingly likely since minutes from the last BoE policy meeting showed a narrow 5-4 split in favour of members voting to hold off on additional stimulus.
UK public sector net borrowing figures, due at 0830 GMT, could add to concerns about the health of economy, casting doubt on the government's deficit reduction plan.
While signs of weakness in the UK economy may weigh on the pound against the safe haven dollar and yen, many analysts said sterling was likely to outperform the euro amid signs European officials were struggling to find a solution to the debt crisis.
Kit Juckes, currency strategist at Societe Generale, said they remained short euro/sterling in a long-term structural trade given the market has not priced in the potential for the European Central Bank to ease policy.
"Euro zone bad news may be "priced in" but the ECB can, by contrast, eke out a few more basis points of downside or rates," he said in a note.
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