LONDON - Sterling rose on Tuesday, helped by recent falls in COVID-19 infections in Britain, optimism around Britain's easing of lockdown restrictions and market anticipation of hawkish signals when the Bank of England meets on Thursday.
The pound had a rebound after most lockdown measures in England were dropped on July 19, reaching as high as $1.3984 at the end of the month. Since then it has stayed mostly above $1.39.
The currency was up 0.4% versus the dollar, at $1.3934 at 1039 GMT. Against the euro, it was 0.2% stronger, at 0.853.
Lee Hardman, currency analyst at MUFG, said the rebound in the pound reflects optimism that the pandemic could be largely over by the Autumn.
"If cases continue to rise less than feared, it will reinforce confidence that restrictions are unlikely to be tightened significantly again allowing the UK economy to continue rebounding strongly during the 2H 2021," he said.
But Kenneth Broux, FX strategist at Societe Generale, said that the cable rally was driven more by month-end flows last week and dollar profit-taking, as well as M&A activity.
Speculators' net short position on the pound also creates a fertile ground for sterling gains, Broux said.
On a quiet day for economic data, investors are looking ahead to the Bank of England meeting on Thursday.
The central bank is expected to maintain its nearly 900 billion pound ($1.25 trillion) bond-buying programme, although two policymakers have broken ranks to suggest that the time for tighter monetary policy might be nearing.
The BoE is expected to be among the first of the world's main central banks to begin the process of stopping stimulus support.
"If the MPC (monetary policy committee) splits, if it's a 6-2 vote or 5-3, that's going to give a signal and I think the market could rally on that," Broux said.
Currency analysts at ING wrote in a note to clients that euro-sterling could stay around 0.8550 before the Bank of England meeting.
"Some positive news on the contagion side (cases continue to decrease in the UK) and expectations that the UK Government will allow a broad re-open of borders in Thursday’s travel-restrictions review are marginally improving the recovery story, but the impact on asset prices is not tangible for now," ING said.
British consumer price inflation will reach 3.9% early next year, almost double the Bank of England's target, but should fall back to 2% the year after if the BoE begins to raise interest rates, a leading think tank forecast on Monday.
($1 = 0.7189 pounds)
(Reporting by Elizabeth Howcroft; Editing by Simon Cameron-Moore and Mike Harrison) ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))