LONDON Sterling hit a one-month high against the dollar on Monday on corporate and sovereign demand, although the possibility of a gloomy mid-year fiscal statement threatened to weigh on the pound.
Sterling climbed to $1.6099 (1.0003 pounds), its highest level since November 2, before paring gains slightly to last trade at $1.6090 (1.000 pounds), up 0.5 percent on the day.
Traders citing demand from corporates to meet dividend payments and on the downside stop-loss sell orders were reported below $1.6020.
UK finance minister George Osborne gives his "autumn statement" to parliament on Wednesday, after saying on Sunday that Britain would take longer to deal with its debt pile and that a recovery will be sluggish.
Economists speculated the independent Office for Budget Responsibility may lower growth forecasts and could also predict Britain will miss its debt-reduction goal.
This in turn could endanger Britain's triple-A credit rating which has spurred demand for sterling throughout much of this year as investors bought UK gilts while fleeing the euro zone crisis.
"Unless the Office for Budget Responsibility does surprise us on those forecasts, the risks are slightly weaker around the statement," said Paul Robson, currency strategist at RBS.
Morgan Stanley, whose FX positioning tracker showed investors had turned neutral on the pound from long positions, said in a note that Osborne was likely to opt to miss the fiscal targets rather than implement more austerity, and both outcomes would weigh on sterling.
Earlier in the session, the pound barely reacted to better-than-expected UK manufacturing data which came in at 49.1, above expectations but below 50, indicating contraction.
The euro traded flat at 81.12 pence, not far from a five-week high of 81.325 pence hit on Friday when German lawmakers approved an aid deal for Greece.
The single currency got a slight boost after Spain formally requested European funds to recapitalise its crippled banking sector.
A stronger euro was helped on Monday by short euro positions being unwound as yields on euro zone government bonds fell and after Greece said it would conduct its bond buy-back programme to trim the country's ballooning debt.
QE IN FOCUS
The Bank of England's Monetary Policy Committee (MPC) will vote on Thursday on whether to increase the bank's asset purchase scheme, known as quantitative easing (QE), although most economists expect it to hold fire.
Moderate initial take-up on Monday, in the BoE's Funding for Lending Scheme (FLS), which offers banks cheap finance and aims to spur growth in the economy in ways QE has failed to, further reduced bets on the Bank embarking on more easing some strategists said.
The Bank has held interest rates at record lows of 0.5 percent since March 2009 and is widely expected to maintain total asset purchases at 375 billion pounds at its next meeting on December 6.
"The forecast for more QE has been taken off for now because a lot of BoE members are of the view FLS is moving in the right direction," said Kiran Kowshik, currency strategist at BNP Paribas. "From that perspective it could be slightly positive for sterling."
(Additional reporting by Philip Baillie)