LONDON Sterling recovered from a one-month low against the euro on Tuesday after upbeat GDP data for the third quarter provided relief to some investors who had braced for a soft reading.
But most investors were cautious about adding significant long positions in the pound, given recent data has been sluggish, keeping alive chances of more easing by the Bank of England in early 2013.
BoE Governor Mervyn King told lawmakers that chances of a rapid recovery in 2013 and 2014 were not very great and added quantitative easing was not leading to an expansion in demand and inflation.
Third-quarter GDP data confirmed growth of 1 percent helped by the Olympic games and shook off mild expectations of a downward revision, which could have hurt the pound.
"Sterling is up as traders breathe a collective sigh of relief, but the bullishness is unlikely to last until the new year," said Glenn Uniacke, senior dealer at Moneycorp.
The pound was higher against the euro, having dropped to a one-month low earlier in the Asian session. The euro was trading at 80.75 pence, down 0.2 percent on the day, and off a high of 81.145 pence hit after a fresh deal on Greece.
Sterling was steady on the day at $1.6025 with traders citing option barriers at $1.6100 which could check gains. It hit a three-week high of $1.6053 on Monday, its strongest level since November 2.
The British pound had risen broadly after the UK government surprised markets by appointing Bank of Canada Governor Mark Carney as a successor to Mervyn King in the middle of 2013.
The highly respected Canadian central banker is seen as potentially more hawkish than his predecessor and less likely to ease policy.
But strategists are quick to point out that the conditions in the two economies are very different and would require different policies. While Canada escaped the global financial crisis almost unscathed, UK has been grappling with a sharp downturn in economic activity and huge pile of public debt.
Analysts say the pound could get a lift if Carney questions the efficacy of the quantitative easing policy that the BoE has employed. QE is usually seen as a drag on the currency as it increases the supply.
Against the Canadian dollar, the pound was at C$1.5895, off a two-week high of C$1.5952 hit on Monday after the BoE announcement of Carney's appointment.
"Yes Carney was more hawkish in Canada but that doesn't mean he will export that to the UK economy because it is structurally different from the Canadian economy and that is why the market is not getting carried away by the appointment," said Audrey Childe-Freeman, currency strategist at BMO Capital Markets.
King said on Tuesday the UK still needs rebalancing in the financial sector, adding it would be unreasonable to expect anything other than a slow and protracted recovery.
(Editing by Stephen Nisbet)