LONDON Sterling hit a three-week high versus the euro and hovered just below $1.30 on Wednesday as investors reined in more of the negative bets that have dominated the past year amid a collapse of concerns over global market volatility.
The pound has benefited over the past month from a general election that looks set to hand more time to Prime Minister Theresa May to conduct Brexit negotiations and the overall process of leaving the European Union.
Traders and analysts also say the UK currency has tended to be one of the beneficiaries of a fall to long term lows in implied currency volatility, allowing investors to buy currencies traditionally attached to periods of stronger and more stable global economic growth.
One-month pound/dollar implied volatility - an option that indicates investor expectations for price movements over the next 30 days, was around 6.2 percent on Wednesday, its lowest since December 2015.
"There haven't been any big drivers this afternoon from headlines, it has been mainly technical," said Clara Leonard, a G10 FX strategist with BNP Paribas in London.
"We remain bullish but mostly against the euro but not the dollar. This is driven by positioning. We think that a lot of the short positioning has been cut and that investors may continue to do so."
Bets against the pound hit a series of record highs between October and the end of March, banking industry data show. They have been falling steadily in the past month as dollar rates headed towards $1.30.
In a week light on data, the main event is Thursday's Bank of England inflation report and policy meeting.
Faced with Brexit unknowns, a national election and mixed economic data, economists say Governor Mark Carney and his colleagues will likely say they want more clarity before laying the ground for the first interest rate hike in nearly a decade.
But after one BoE policymaker voted for a rate rise in March, any signs of change in the Bank's stance of keeping UK rates at record lows is liable to provoke a bounce for the pound.
Sterling rose as much as 0.4 percent to $1.2988 in morning trade on Wednesday before falling back to stand flat on the day at $1.2934.
It gained 0.3 percent to hit a three-week high of 83.83 pence per euro before retreating to 84.05 pence.
"The focus now is really on the Bank of England, and maybe that could be an explanation (for sterling strength)," said Richard Falkenhall, currency strategist with SEB.
He pointed to policymaker Kristin Forbes' vote for a rate hike in March and the possibility that other members of the Bank's rate-setting committee could follow suit.
"It could also be as simple as there is right now a silent period, so to speak, when it comes to the Brexit negotiations because of the UK election."
(Editing by Andrew Heavens and Ken Ferris)