Sterling rose to a two-week high against a basket of currencies on Tuesday, bolstered by talk of a 740 million pound rescue package for troubled UK mortgage lender Northern Rock.
Sterling had been pressured in recent weeks by worries about the health of Britain's financial sector and thus the economy - kick started last month by news that Northern Rock had fallen victim to the credit market squeeze and been forced to tap the Bank of England for a last resort loan. News this week that profits at global banking heavyweights UBS, Citigroup and Credit Suisse will be hit by the credit market squeeze had also hit sterling.
But talk of a rescue bid for Northern Rock - on which the mortgage lender declined to comment - lifted sentiment, at least for now. "The Northern Rock story had a marginally positive impact on sterling, hence its recovery against the euro," said Marios Maratheftis, currency strategist at Standard Chartered. "But going forward there are still concerns about the sustainability of the UK economy. The focus is gradually shifting from the US and the UK (housing market) and I would see sterling as an underperformer."
By 1415 GMT sterling was steady at $2.04141, having recovered from session lows of $2.0371. The euro fell 0.4 percent to 69.34 pence, retreating from last week's 2-1/2 year peaks of 70.29 pence.
Against a trade weighted basket of currencies, sterling rose to 102.70, its highest since mid-September. Investors are looking ahead to the Bank of England's rate decision on Thursday, with a Reuters poll giving a 15 percent chance of rates being cut from the current 5.75 percent. Analysts say though that markets are pricing in a bigger chance of a cut this week, ranging from 20 to 40 percent.