LONDON Sterling hit a two-week high against the dollar on Wednesday, helped by Bank of England minutes suggesting more monetary easing was unlikely in the near term.
The minutes showed only one policymaker voted for more quantitative easing at the BoE's meeting this month, giving the pound a small boost. Some in the market had seen a risk of more support for QE, which is normally seen as negative for a currency because it increases its supply.
But analysts said the pound's gains may be limited because the minutes suggested more QE was still possible in early 2013.
The pound rose to $1.5949, its strongest since November 9, as it continued to recover from last week's two-month low of $1.5828. But traders said it may struggle to make more gains due to reported offers up to $1.5950. It was last trading at $1.5935, up marginally on the day.
The Bank minutes said policymakers felt a case could be made for a further easing in monetary conditions to help boost the economy, in part by discouraging any further appreciation of sterling.
Higher-than-expected public sector borrowing data also highlighted concerns about how a weak UK economy may hamper efforts to cut the deficit.
"There is not much to like about the pound at the moment ... A central bank that says it doesn't mind having a weaker currency will not get a stronger one," said Kit Juckes, currency strategist at Societe Generale.
"If the pound were to break below the $1.5850 area it could accelerate those losses and fall towards $1.56 or $1.55."
The pound also rose against the euro in early trade after euro zone officials and the International Monetary Fund ended 12 hours of talks without a deal on Greece's next batch of aid.
But it pared losses as German Chancellor Angela Merkel told a closed-door meeting of lawmakers that lower interest rates and an expanded EFSF rescue fund could fill Greece's financing gap.
"Sterling is following a short-covering rally in the single currency rather than anything particularly fundamental and the soothing words from Angela Merkel, helping sterling higher," said Michael Derks, chief strategist at FX Pro.
That could be seen as traders pulled money out of the euro and into the pound. Investors seeking safety from the euro zone debt crisis have been buying UK gilts, giving a boost to sterling.
"Short-term sterling stands to gain from anti-euro trades," said John Hardy, currency strategist at Saxo, referring to investors looking to find alternatives to the euro if uncertainty over Greek funding continues.
The euro was flat against sterling at 80.43 pence, having earlier hit a one-week low of 80.07 pence.
More falls could pull the euro towards chart support around 79.85 pence, marking a trendline drawn from the euro's 2012 low of 77.56 pence hit in July, and then the 100-day moving average at 79.64 pence.
Investors will keep an eye on flash PMI surveys due out on Thursday for further clues of weakness in euro zone economies after a recent string of weaker data from Europe's core.
While the euro zone has slipped into recession, the UK returned to growth in the third quarter, and more weak data from the currency bloc would lend support to the pound against the euro.
The pound also rose to a seven-month high against the yen at 131.26 yen as the Japanese currency came under pressure on speculation of more monetary easing in Japan.
(Additional reporting by Jessica Mortimer; Editing by Susan Fenton)