LONDON Sterling rose against the dollar on Monday after officials said the euro zone was likely to give a tentative go-ahead to releasing 44 billion euros in aid to debt-stricken Greece.
The pound tracked a rise in the euro against the dollar after euro zone officials said finance ministers would unfreeze emergency loans to Greece on Tuesday.
Sterling climbed 0.2 percent to $1.5910, moving away from a two-month low of $1.5828 hit last week.
Broad euro strength meant the single currency rose 0.4 percent against the pound to 80.50 pence, although resistance was expected around last week's high of 80.65 pence, and at the 200-day moving average around 80.78 pence.
"Euro/dollar has broken higher and dragged euro/sterling with it. As a by-product cable (sterling/dollar) is also a bit better bid," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
Stretch said the pound's strength against the dollar could be short-lived given the UK's weak economic outlook and he would be looking to take profit around $1.5950/60.
That level marks the 38.2 percent retracement of the early to mid-November fall from around $1.6170 to $1.5830.
Some strategists said the positive sentiment surrounding a Greek aid deal was overdone and the prospect of more weak euro zone data ahead should cap gains.
"There seems to be some misplaced optimism around Greece and from the debt talks, but more risks lie ahead," said Richard Driver, currency strategist at Caxton FX, adding euro/sterling below 80 pence would be fairer value.
Signs U.S. politicians were willing to compromise to avert a$600 billion "fiscal cliff" of tax rises and spending cuts due to come in early next year also lifted demand for perceived riskier currencies against the safe-haven dollar.
BOE MINUTES AHEAD
With little UK data scheduled, the main focus for sterling investors this week will be the release on Wednesday of minutes from the Bank of England's November meeting.
Market players will scrutinise the minutes to try to gauge the likelihood of further monetary easing (QE).
Analysts are expecting the vote against more easing in November was almost unanimous, but could look for clues on how policymakers view the government's recent decision to transfer the interest proceeds of QE from the Bank to the UK treasury.
Bank's Governor Mervyn King said after the transfer was announced that it equated to modest monetary loosening.
Some strategists said concerns about UK growth were likely to limit any potential gains for sterling, even if the minutes prompt investors to pare back bets on further QE.
Quantitative easing involves printing money to buy bonds and tends to be seen as negative for a currency by boosting supply.
"The UK is set for a fairly long period of weak economic growth and no tightening of policy. Sterling continues to tread a very thin line between being a relative safe haven and looking expensive given the current account deficit," said RBS's Robson.
The UK emerged from recession in the third quarter but recent data has been weak and public sector borrowing figures due for release on Wednesday should give an indication of whether the government will come close to meeting deficit reduction goals.
(Additional reporting by Philip Baillie, editing by Nigel Stephenson)