Sterling traded firmer in late European trade on Tuesday, but liquidity was thin due to the US Independence Day holiday which kept investors on the sidelines. In recent sessions sterling came under pressure on expectations the European Central Bank would raise interest rates faster than the Bank of England.
In the absence of major British data on Tuesday, analysts say sterling rebounded on short covering. "It's more positioning and technical and there's nothing fundamental behind the moves," said Carole Laulhere, currency strategist at Societe Generale in Paris.
"In the last two weeks we had revisions on Euribor while the view on the Bank on England (BoE) is more neutral." By 1401 GMT, sterling was up 0.27 percent against the dollar at $1.8471 and also gained a quarter percent versus the euro at 69.30 pence - not far from a two-month low at 69.58 hit on Monday.
Chartists say euro/sterling has been pushing upward in recent weeks and testing the upper limit of its six-week ascending channel, which stands at about 69.55 pence.
"A further break above here will open upside potential towards the longer term trendline resistance currently placed at 70.05 pence," BNP Paribas said in a note.
Analysts say sterling will struggle in the run up to an ECB rate-setting meeting this week. Investors will be eager to hear whether the ECB confirms recent speculation that it is ready to accelerate its monetary tightening campaign, with many betting it will signal this week a rate hike in early August.
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