LONDON: Sterling rose to a three-month high against the dollar on Wednesday, extending gains made the previous day on expectations the European Central Bank will take action to stem the euro zone crisis.
Traders cited demand from a large US investor and said the pound's break through key technical levels on Tuesday was encouraging investors to buy the currency.
The pound rose 0.15 percent to $1.5818, its strongest since late May, having closed on Tuesday above its 200-day moving average - now at $1.5716 - and the 100-day moving average at $1.5747.
However, analysts said growing worries about a poor UK economic outlook could limit its rise and market participants may look to take profit at levels above $1.5800.
"People will be looking for levels to resell sterling against the dollar ... Nine out of 10 people are bearish on the UK economy," said Kit Juckes, currency strategist at Societe Generale.
Traders said stop loss buy orders were triggered when the currency rose above $1.5810, helping the pound extend its gains. However, it was expected to struggle to breach a reported options barrier at $1.5850, which roughly coincides with a peak hit on May 22.
On Wednesday, Bank of England policymaker Adam Posen told the BBC that the UK was stagnating and that if the euro zone situation got worse or if the bloc broke apart it would overwhelm the UK economy.
Data on Tuesday showed Britain's public finances unexpectedly veered further off-track in July while a survey revealed a sharp fall in factory orders this month as demand for consumer goods dropped.
The pound has largely shrugged off poor UK data recently and has been buoyed in tandem with the euro on expectations the ECB will intervene next month by buying Spanish and Italian bonds in order to ease their borrowing costs.
The euro edged down 0.1 percent against the pound at 78.87 pence, having earlier risen to a two-week high of 79.10 pence.
Most analysts expect any gains in the euro to be capped, probably keeping it below the early August high of 79.63 pence due to uncertainties over the effectiveness of ECB bond-buying and worries about a weak euro zone economy.
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