LONDON - Sterling edged higher on Monday versus the dollar, ahead of a Bank of England meeting later in the week, as global risk tone improved on optimism for the U.S. infrastructure bill.
Sterling rose 0.2% versus the dollar to $1.3928 by 0830 GMT, after hitting a five-week high of $1.3983 on Friday, closing its best week versus the weakening greenback since early May.
U.S. senators introduced a sweeping $1 trillion bipartisan plan to invest in infrastructure, with some predicting the chamber could pass this week the largest public works legislation in decades.
Prospects of the U.S. bill passing provided support for riskier assets like the pound and stocks, said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.
"Sterling is proving relatively well bid into the start of the week on the back of an improved risk tone..., helped in part by optimism as regards the U.S. infrastructure bill," he said.
A drop in COVID-19 cases and the reopening of the British economy have fuelled a rebound in the pound in July, with the currency re-emerging from its biggest fall in nine months in June.
The BoE's Monetary Policy Committee, which meets on Thursday, is expected to keep its foot firmly pressed on the stimulus pedal. But there is growing discussion about the need to begin tapering its bond-buying programme as the economy recovers.
"The prospect of continued consumer led growth, allied to a material upgrade in the CPI (inflation) profile, could encourage at least two of eight MPC voters to vote to curtail bond purchases," Stretch said.
Versus the euro, sterling was flat at 85.32 pence.
(Reporting by Joice Alves; Editing by Simon Cameron-Moore) ((Joice.Alves@thomsonreuters.com, twitter @joiceal))