Sterling rose to a seven-week high against the dollar on Tuesday, tracking gains in the euro ahead of a keenly-awaited summit of European leaders.
Sterling was last up 0.1 percent at $1.6008, close to an earlier peak of $1.6042, its strongest since Sept. 8. However, it faced technical resistance above this high, with the 21-week average around $1.6044 and the 55-week average at $1.6047.
"Sterling is back above $1.60, which reflects a pick-up in general risk sentiment on hopes for a comprehensive solution to the euro zone's debt problems and some better U.S. data," said Geraldine Concagh, economist at AIB Group Treasury in Dublin.
"The market is waiting to see what comes out of the EU summit, with the potential for disappointment".
Further technical resistance was seen at the Sept. 8 peak of $1.6084 and at $1.6103, the 61.8 percent retracement of the August high above $1.66 to the October low of $1.5270. Traders also said trading in sterling may be influenced by a reported options expiry at $1.60 later in the day.
Optimism about the prospect of a comprehensive deal to resolve euro zone debt problems has waned, with disagreement remaining on critical aspects, including how to give the region's bailout fund greater firepower.
Analysts said this left plenty of room for disappointment, particularly given the current strength of the euro and other riskier currencies, including sterling.
Analysts said the pound may see some reaction to a Confederation of British Industry survey on industrial trends at 1000 GMT, though this was likely to be limited as focus quickly switches back to events in the euro zone.
The euro was up 0.15 percent at 87.04 pence , though it was not far from a two-week low of 86.70 pence.
Technical analysts highlighted the 55-day moving average crossing below the 200-day moving average for euro/sterling, often seen as a bearish signal. The 55-day has traded above the 200-day since November 2010.
"The outlook remains negative (for euro/sterling) - it has recently failed at the 87.94 pence late September high and directly above the market lies tough resistance, which extends to the 88.86 August high and we favour failure here," technical analysts at Commerzbank analysts said in a note.
Further falls could see the euro move towards the 200-week moving average -- currently around 85.37 pence --, they said.
However, the fundamental outlook for sterling remained bleak, with economic growth fragile and the Bank of England implementing a further round of quantitative easing.
BoE Governor Mervyn King said on Tuesday that policymakers had come very close to restarting QE in September but held off to see if volatility in financial markets would subside, before taking the decision to resume in October.
read more: Olympus Wealth Management
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