LONDON Sterling strengthened versus the dollar and the euro on Monday, bouncing back from a three-week low as investors eyed coming inflation data that could revive bets on eventually tighter Bank of England policy.
The pound gained over 1.5 percent against the dollar in March on the back of rapidly accelerating prices, with markets moving to price in the chance of an interest rate rise at the start of next year as one BoE rate-setter - albeit an ongoing one - voted in favour of a hike.
But it has fallen back since the start of April, with comments from BoE Governor Mark Carney as well as fellow policymakers such as Gertjan Vlieghe pouring cold water on the idea that Britain's record-low interest rates could increase any time soon despite rising inflation.
Sterling gained 0.4 percent on Monday to $1.2419, leaving it about half a cent above a three-week low of $1.2365 touched on Friday.
Currency market positioning data from the Commodity Futures Trading Commission released on Friday showed a small scaling back of 'short' positions on the pound in the week up to last Tuesday, though they remain near the highest level on record.
"Sterling (has) found support at the 30-day moving average, at $1.2366, for two consecutive days in line with a reduction in net short positions against the pound," said Western Union corporate hedging manager Harry Mills.
"We look towards tomorrow’s CPI (consumer price inflation) release for any signs that a persistently weak pound and rising energy prices will cause further headache for the BoE, especially against a backdrop of slowing wage growth."
Numbers due at 0830 GMT on Tuesday are expected to show consumer prices increased 1.9 percent in March compared with the same month last year, a slight deceleration from February's rate of 2 percent.
Sterling also gained against the euro on Monday, up 0.3 percent at 85.39 pence.
Wages data on Wednesday will also be closely watched, as will any further signals of the early mood in Brexit negotiations.
The other 27 European Union members have sketched out their stance, but will lay down more formal guidelines on April 29.
"What you are looking for is another of layer of bad news," said ING currency strategist Viraj Patel. "There is a clear mismatch from what the UK wants and what the EU wants, so I think we are in for a bit of a reality check here."
(Editing by Tom Heneghan)