Pound rallies to 3-week high vs euro and dollar

By Naomi Tajitsu

LONDON (Reuters) - Sterling hit a three-week high against the euro on Wednesday, recovering from early losses as investors squared short positions in the currency ahead of an announcement on interest rates later in the week.

The UK currency rallied more than 1 percent against the dollar, climbing above the psychologically key $1.50 level for the first time since mid-December, as the dollar suffered broadly due to a dismal reading of U.S. private sector jobs.

The Bank of England began a two-day monetary policy meeting on Wednesday, and most investors expect a 50 basis point cut in the base rate from 2.0 percent, with the chance that a bigger cut may be in store to cushion the blow of a deteriorating economy.

At the same time, UK media reported the shadow Monetary Policy Committee believes rates should be held at 2.0 percent while the central bank focuses on other measures to boost the economy, including so-called "quantitative easing".

Given that the size of a cut may be anyone's guess, market players said traders were wary of being heavily positioned for or against sterling, prompting some to close short positions.

"Running a position heading into tomorrow's meeting could be tricky, when the Bank could cut 25, 50, 75, or even 100 basis points or nothing," said Maurice Pomery, head of currencies at IDEAglobal in London.

"That explains why people are book-squaring quite heavily that the moment."

The pound rallied against the euro, which fell half a percent to 89.60 pence according to the Reuters dealing system, breaking under the key 90 pence level for the first time since mid-December.