Sterling rose 1 percent on the day versus the dollar on Tuesday, extending gains as traders continued to cover short positions in the UK currency after it fell the previous day. Sterling climbed to the day's high of $1.5208. A climb above $1.5218 would be the strongest since the start of the month.
Sterling rebounded from early falls, aided by robust housing data and opinion polls, though analysts said worries over Britain's fiscal health and political uncertainty would continue to weigh on the pound. Sterling had been under pressure as the market sold the pound in reaction to a European Commission draft recommending more fiscal cuts in the UK, adding to concerns over a spiralling budget deficit.
The pound fell at the European open on the draft, obtained by Reuters, which suggested the Commission will tell Britain to do more to cut its deficit in the medium term. The move prompted a rejection from the British government, with Treasury Chief Secretary Liam Byrne saying, "We think the EU has got the judgement wrong."
Stronger than expected housing data from DCLG, showing prices rose 6.2 percent year-on-year in January, provided some support, albeit short-term. At 1215 GMT, sterling> was trading up around 0.5 against the dollar at $1.5130, making a sharp recovery off earlier lows of $1.4977.
Traders said a large euro/sterling sell order had also provided support to the pound. Euro/sterling traded with losses of around 0.3 percent at 90.60 pence. The market will look to the minutes of the latest BoE meeting, due out on Wednesday, which are expected to show a decision to leave policy unchanged was unanimous. Also on the radar is UK public spending data due out on Thursday. UK finance minister Alistair Darling will present a budget on March 24, just weeks before a national election expected on May 6.