Sterling rose against the dollar on Thursday, tracking gains in the euro and other riskier currencies as expectations that the German parliament would ratify the euro zone rescue fund's new powers helped lift sentiment.
Markets were cautious, however, as German Chancellor Angela Merkel may have to rely on opposition support, highlighting the political hurdles that could hinder euro zone leaders' efforts to find a solution to the region's debt crisis.
In the UK, markets will look out for second-tier UK lending data at 0830 GMT, which are expected to show a very modest rise in mortgage approvals in August.
"Firmer data will be sterling positive but these figures are not seen as important," said RBC currency strategist Adam Cole.
He added that stronger-than-expected data would have more of an impact than weaker numbers, given that the market was to some extent already pricing in the prospect of more monetary easing by the Bank of England.
"The market is focused at the moment on the degree to which Merkel has to rely on opposition support".
Sterling was up 0.55 percent against the dollar at $1.5661, with near-term resistance seen at Tuesday's high of $1.5705. Traders cited an options expiry at $1.5600 that may influence price action.
The pound stayed comfortably above its recent one-year low of $1.5326, but analysts said its scope for further gains was limited.
"Sterling/dollar is likely to break above Tuesday's high of $1.5705 and rise to the $1.5780/1.5820 resistance area before reversing downwards," technical analysts at Societe Generale said.
The trend for sterling is still seen as negative given concerns about a fragile UK economy and its vulnerability to any escalation of the euro zone debt crisis, as well as the risks of more quantitative easing from the BoE.
BoE chief economist Spencer Dale said in a newspaper interview on Thursday that the weakening of the global economy looked more persistent than first thought and more monetary stimulus may be needed if the situation worsened further.
The pound dipped against a firmer euro, with the single currency up 0.2 percent at 87.14 pence, just ahead of its 200-day moving average around 87.12 pence.
Traders said month-end and quarter-end flows may influence trading. They said market speculation of an imminent large euro sell order relating to the EU's annual farm subsidy to the UK could support the pound.
Earlier, data from mortgage lender Nationwide added to the negative picture on the UK economy, showing British house prices failed to recover from August's slide this month, due to sluggish demand for new properties and a weak jobs market. (Editing by Anna Willard)
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