Sterling traded close to its highest in more than 3 months versus the dollar on Tuesday ahead of an injection of cheap funds by the European Central Bank that is expected to boost investors' appetite for riskier currencies. However, it pulled off highs, tracking a move lower in the euro after Ireland's Prime Minister said Ireland would hold a referendum on Europe's new fiscal treaty.
Sterling's moves were largely driven by events elsewhere, though sentiment was helped by a survey showing British retail sales improved more than expected in February, adding to signs of a tentative UK recovery. The pound was steady against the dollar at $1.5830, having risen as high as $1.5876, when it failed to test its 200-day moving average at $1.5903.
The euro was steady at 84.72 pence, above its 100-day moving average at 84.69 pence and not far from Friday's 2-1/2 month high of 85.06 pence. Traders said this key technical level was acting as strong resistance, stopping it breaking above Monday's high of $1.5904 and the February 8 peak of $1.5929, which would mark its highest since mid-November last year.
"All attention is on the LTRO (ECB longer term refinancing operation) and as such sterling is not the catalyst for moves but rather being dragged around by other currencies," said Richard Wiltshire, chief FX Broker at ETX Capital. Sterling was well above last week's low of $1.5648, plumbed after the release of more dovish-than-expected BoE minutes which pointed to a risk that policymakers could opt for more quantitative easing to boost the economy later this year.
The ECB's fresh injection of 3-year money on Wednesday is expected to bolster demand for the euro and other currencies perceived to be risky, including sterling, if there is a large take-up. But investors were mindful of risks ahead that could knock sentiment. The Irish announcement highlighted the hurdles facing euro zone leaders as they seek to reach a political consensus on any solution to the region's debt crisis.
There were also concerns about whether Greece can implement the harsh austerity measures demanded of it in return for a bailout, while the possibility of the Bank of England opting for another round of monetary easing may limit gains for sterling. "There might be another attempt to break the top at $1.59 but I don't think that it will necessarily have much momentum above there," said Jeremy Stretch, currency strategist at CIBC.
Last week's BoE minutes propelled the euro above its recent range that had seen it trapped below the 84 pence level. Citi strategists issued a sell recommendation on the euro against sterling, entering a short euro position at 84.73 pence and targeting a drop to 82.50 pence, with a stop loss at 85.55 pence. They argued markets had "gone too far in buying EURGBP last week" and that the sell-off in sterling following the BoE minutes provided an opportunity to buy.