Sterling rallied versus the dollar on Tuesday, tracking gains in the euro, as a rise in global stocks boosted risk sentiment and prompted investors to cut bets the pound would fall. Cautious optimism that policymakers were putting together measures to ease the eurozone debt crisis supported demand for riskier currencies versus the safe haven dollar and helped stock markets extend gains.
But analysts said the rally was down to an absence of bad news rather than expectations of a concrete plan to beef up the region's bailout fund, and was likely to be short-lived given lukewarm German support. Sterling was last up 0.7 percent at $1.5675, off a session low of $1.5527. Investors were cutting back on bets to sell the UK currency after it fell to a one-year low against the dollar last week.
The pound rallied strongly after breaking through stops around $1.56 and technical resistance around $1.5627, the 23.6 percent retracement of the August 19-September 22 fall. The euro was a touch lower on the day at 86.86 pence, hovering within range of a six-month low of 85.31 pence hit earlier in the month.
It faces more downside pressure after making a decisive break below 87.08 pence, its 200-day moving average, which was seen as key technical support. Traders said gains could be capped by sovereign interest to sell sterling rallies. "The market was very short cable and this dollar weakness is more of a risk positive trend," said Adrian Schmidt, FX strategist at Lloyds.
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