Sterling rose to a 12-week high against the dollar on Tuesday, tracking broad gains in riskier currencies on expectations Greece might secure a second bailout and avoid a messy default. Sterling rose 0.5 percent to a high of $1.5903, surpassing the February 1 high of $1.5884 to mark its strongest since mid-November.
The pound fell versus a firmer euro, however, after a Greek official said the government was drafting an agreement for political leaders to approve, raising hopes feuding political parties will agree to austerity measures demanded as a condition of a 130 billion-euro rescue package.
The euro gained 0.5 percent against sterling to 83.40 pence, having hit 82.52 pence, its strongest in a week and well above a near three-week low of 82.64 pence hit on Monday. Although the market was focused firmly on developments in Greece, analysts said sterling could come under pressure later this week given expectations the Bank of England (BoE) will announce further monetary stimulus on Thursday.
The dollar also came under pressure after US Federal Reserve Chairman Ben Bernanke maintained a cautious tone in testimony before Congress and did not refer to surprisingly strong US jobs data released on Friday. "It would appear we are nearing a result on Greece and in addition Bernanke is sticking to the message from last week that US rates will stay low for a long time," said Audrey Childe-Freeman, currency strategist at J.P. Morgan Private Bank. "This is why euro/dollar is higher and euro/sterling is just following."
"Early this week, sterling is being driven by anything but any UK consideration," he said. Later in the week, focus will turn to Thursday's BoE policy meeting, when the central bank is expected to inject an extra 50 billion pounds into a faltering economy under its quantitative easing programme. Quantitative easing involves flooding the market with more pounds and is usually negative for the currency.
Although UK purchasing managers' surveys last week indicated business activity was improving, a survey on Tuesday showing retailers suffered their second-worst January since records began in 1995, pointed to continued problems for the UK economy.