LONDON: Sterling was steady below a four-month peak against the dollar on Wednesday, supported by expectations of more monetary easing by the US Federal Reserve, which has underpinned demand for perceived riskier currencies.
But the UK currency lagged the euro, which was buoyed by growing confidence in euro zone assets after Germany's Constitutional Court ruled in favour of ratifying the region's new rescue fund and the European Central Bank's bold plans to lower borrowing costs for struggling countries.
Traders and analysts said the pound could rise further against the dollar if the Fed does relaunch its bond-buying programme, which tends to weigh on the dollar, but sterling was also vulnerable to the risk policymakers will hold fire.
Sterling was flat on the day at $1.6115, not far from its four-month high of $1.6132. Traders cited offers to sell the pound from hedge funds and sovereign investors at $1.6130 to $1.6150.
The pound is also nearing the top end of its year-long trading range, roughly between $1.52 and $1.63, and many analysts say further gains could be a struggle.
"So much is priced in with the Fed easing, that if it does not deliver anything, we could see a dollar rally and sterling will come under pressure," said John Hardy, currency strategist at Saxo Bank.
"But chances of that happening are less and we expect the dollar to head lower. Having said that, cable will struggle to rise past those April highs of $1.63."
The Fed is due to release a statement after its policy meeting at 1630 GMT. Many Fed watchers believe any new asset purchase programme would be open-ended, unlike the past two cycles of quantitative easing. That would allow the Fed to review the size of its purchases on a frequent basis and adjust the programme as economic circumstances warrant.
The pound fell against the euro, with the common currency trading firm at 80.175 pence, not far from a 10-week high of 80.28 pence struck on Wednesday after the German Constitutional Court verdict.
"Some short euro positions are being squeezed and we could see that going on for a bit more, taking it past 81 pence," said a London based spot trader. Offers to sell were cited above 80.25 pence.
But traders said the euro's gains against sterling could be short-lived as the UK economy appeared to be outperforming the euro zone.
Data on Wednesday painted a better-than-expected picture of the UK labour market, backing some of the recent data from the manufacturing and services sectors that have indicated a rebound for the economy from a damaging recession.
In contrast, the euro zone economy was still mired in a deep slowdown and there are expectations that the ECB may have to lower interest rates in coming months.
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