LONDON Sterling slipped from a six-week high against the dollar on Thursday as investors took some profits after the Federal Reserve eased policy and attention switched to U.S. fiscal problems.
Some strategists said sterling could strengthen against the dollar in coming weeks, however, if Bank of England policymakers hold off from signalling further monetary easing in Britain.
With no more UK data due this week traders said attention will now focus on wrangling over U.S. budget problems, the so-called U.S. fiscal cliff, a combination of tax cuts and spending hikes due to kick in at the beginning of 2013.
Some analysts said if lawmakers resolve budget problems before the year end, the dollar could weaken.
"Any solution to the fiscal cliff is going to be positive for risk appetite, which could initially see the dollar weaken and the pound hold onto these gains," said Philip Hoey, senior account manager at Caxton FX.
Sterling dipped 0.1 percent to $1.6120 (999 pence), retreating from a six-week high of $1.6173 (1.0024 pounds) hit on Wednesday after the Fed said it would bolster its quantitative easing programme by $45 billion (27 billion pounds) a month, on top of $40 billion the Fed is already buying in mortgage-backed securities.
The pound has rallied more than 2 percent against the dollar in the last month as markets positioned for more asset-purchasing from the Fed, prompting some investors to take profit on earlier bets that the pound would rise.
"Sterling/dollar rallied from (around) $1.58 on November 15 to $1.6172 yesterday so there was probably a little profit-taking," said Ned Rumpeltin, head of G-10 FX strategy at Standard Chartered.
Rumpeltin said the dollar's recovery after the initial Fed announcement suggested markets were getting less sensitive to the major central banks printing money, which tends to weigh on a currency by boosting supply.
UK INFLATION DEBATE
The euro was up 0.2 percent at 81.10 pence, holding within the range roughly between 81.65 and 79.60 pence that it has traded in since October.
Strategists said moves in euro/sterling were likely to be swayed by developments in the euro zone in coming months.
Markets are waiting to see whether Spain will apply for aid, triggering the European Central Bank's bond-buying scheme that is seen as providing a backstop to peripheral debt markets.
In a 2013 outlook Morgan Stanley said euro/sterling would hit 83 pence in the first quarter of 2013 on condition the bond-buying scheme is implemented, before dropping back towards 78 pence by the end of the year.
Part of the reason why the euro could struggle is because of a grim outlook for the euro zone. But such an outlook is also bad news for the UK, given the region is Britain's biggest trading partner.
BoE policymaker Paul Fisher said the BoE may need to pursue more quantitative easing once there were signs inflation had dropped, but sterling was little changed after his comments.
Earlier, data showed British factory orders rose above their long-run average this month, but there was little reaction in sterling.
(Editing by Jeremy Gaunt)
Our top photos from the last 24 hours.