Sterling rose from the previous session's three-week low against a broadly weaker euro on Tuesday, underpinned by the latest evidence that the UK housing market is picking up.
A report by the Royal Institution of Chartered Surveyors (RICS) showed British house prices rose for the first time in over a year and surveyors were optimistic about further gains.
The British Bankers' Association said mortgage lending posted its biggest rise in more than a year in November.
"The RICS survey showed stabilisation in the market and the headline number was better than expected. Details were encouraging although (RICS comments) anticipated an interest rate cut," said Daragh Maher, currency strategist at Calyon.
By 1500 GMT sterling was up around 0.6 percent at 67.70 pence per euro, off Monday's three-week low of 68.17. Against the dollar it held steady at $1.7606.
Investors are now waiting for Wednesday's release of the Bank of England's minutes from its last meeting where policymakers are expected to have voted unanimously to keep interest rates steady at 4.5 percent.
Some are nervous about a dovish outcome following recent comments from Bank of England chief economist Charlie Bean which the market interpreted as a hint that UK interest rates could fall in the next year.
"There are expectations (Bean's comments) might be reflected in the minutes and doves might be more concerned about growth and deceleration in inflation. The risk is the minutes would come out more dovish than the previous month, which would be sterling negative," Maher said.
Many expect the BoE to follow up its August quarter-point rate cut with another in early 2006 to shore up the economy - further diluting sterling's yield advantage.
"Bean hinted towards a rate cut in the first part of the year and there is general concern about the possibility of a rate cut," a UK bank dealer said. Britain's budget deficit hit a record high for November as government spending from the month before spilled over into the latest figures.
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