LONDON Sterling held steady near its highest level in more than a week against the dollar on Tuesday, helped by optimism Greece would be given more funding while investors awaited Bank of England minutes.
Euro zone finance ministers are expected to give tentative approval for the next tranche of loans to Greece later on Tuesday, which analysts said should give a boost to the euro and riskier currencies, including sterling.
The pound was steady at $1.5915, having earlier risen as high as $1.5936, its highest since November 9.
This took it well above last week's two-month low of $1.5828, with chart support cited at the 100-day moving average at $1.5884.
"It seems as though there's a bit of optimism going into the euro zone negotiations on Greece. This could give the risk-on signal that the market is looking for," said Nawaz Ali, analyst at Western Union Business Solutions.
Sterling may also gain if BoE minutes on Wednesday suggest policymakers are likely to hold off from implementing more quantitative easing (QE) for now.
"Traders will want to know whether they can put away the QE story until next year or whether they will need to price in the possibility of more QE before Christmas," Ali said.
QE is usually viewed as negative for a currency as it increases the supply.
The euro edged lower against the pound, trading down 0.1 percent at 80.44 pence and stuck below last week's high of 80.65 pence and the 200-day moving average of 80.77 pence.
Even if a deal is secured on Greece, however, analysts said the euro's gains may be limited as the money is unlikely to be released before December and a deal on debt reduction could require further talks.
An earlier credit rating downgrade on France by ratings firm Moody's also hampered the euro.
"Ratings in the core are back under pressure with France in the spotlight. That has traditionally provided sterling with some support as it is seen as a safe haven from Europe," said Ian Stannard, head of European FX strategy at Morgan Stanley.
But he remained negative on the pound against the dollar in the medium term. He said any gains would be limited to the $1.5950-$1.5960 area before it comes back under pressure.
However, against a broadly weaker Japanese yen, the pound rose to a six-and-a-half month high of 130.17 yen on expectations that the Bank of Japan may soon embark on more aggressive policy action.
Market players will look for clues in the BoE minutes on whether policymakers view the government's recent decision to transfer the interest proceeds of QE from the BoE to the UK treasury as lessening the need for further easing.
Governor Mervyn King has equated the move to modest monetary loosening.
"If there is a sign of (Monetary Policy Committee) members moving away from quantitative easing or that the) don't think it is that effective we could see upside in sterling, it could probably recover some of last week's weakness," said Kathleen Brooks, research director at FOREX.com.
But analysts said concerns about UK growth may limit any gains for sterling.
The UK emerged from recession in the third quarter but recent data has been weak and market players will also be watching public sector borrowing figures, due on Wednesday at the same time as the BoE minutes.
"The public finance data tomorrow will be important to see exactly how far the government's finances are running behind target. There is a risk that could put sterling back under pressure." Morgan Stanley's Stannard said.
(additional reporting by Anooja Debnath; editing by Stephen Nisbet)