LONDON Sterling hit a six-week high against the dollar on Wednesday, helped by the prospect of further easing from the U.S. Federal Reserve and a better-than-expected UK employment report.
Some strategists said the pound could extend its gains if the Fed opts for more aggressive quantitative easing than the $45 billion (27 billion pounds) a month of asset purchases most economists are expecting.
But other market players said concerns about underlying weakness in the UK economy could leave the pound vulnerable.
"We still have a negative view on sterling at this stage, unless the Fed comes out with an Operation Twist replacement programme which is quite aggressive, adding more than $50 (30.99 pounds)/60 billion to the balance sheet," said Geoffrey Yu, currency strategist at UBS Warburg.
Sterling climbed to $1.6149 (1.0008 pounds), its highest level since November1, before paring gains to last trade close to flat on the day at $1.6114.
Market players reported offers at $1.6150, while chart support came in around the 55-day moving average at $1.6036.
Traders said sterling could test the early November high of $1.6176 if the Fed surprises markets with more aggressive easing when its two-day policy meeting ends later in the session.
Quantitative easing usually pushes a currency lower as it increases the supply of money.
The pound rose earlier in the session on UK data showing an unexpected fall in the number of people claiming unemployment benefits and also a record high in the number of people in work.
UK ECONOMY CONCERNS
The euro climbed 0.25 percent on the day against sterling at 80.88 pence, pulling further away from a three-week low of 80.35 pence hit on Monday.
Strategists said with little UK economic data this week, sterling moves will be dictated by developments in the euro zone and news on the U.S. "fiscal cliff" of tax hikes and spending cuts due to kick in early next year that could tip the world's largest economy into recession.
"We are going to get fairly choppy trade in euro/sterling over the next few weeks into year-end," said Kathleen Brooks, research director at FOREX.com.
"If we can continue with this momentum we can break above 81.00 pence, but there is huge resistance at around 81.50-60 pence, the highs seen earlier this month."
Some strategists said the pound was vulnerable to selling given weakening UK growth forecasts. While the UK might skirt recession, growth will be disappointing according to the latest Reuters poll.
The Bank of England's chief economist Spencer Dale added to the gloomy outlook, saying on Wednesday that slow growth and stubborn inflation will likely plague the economy while it struggles to recover from the financial crisis.
Meanwhile, hints of policy easing measures from newly appointed Bank of England governor Mark Carney during a speech on Tuesday could add to bearish bets on the pound. Carney, who is now Bank of Canada governor, suggested there were benefits from having flexible inflation targets.
(Additional reporting by Philip Baillie; Editing by Hugh Lawson)