Sterling hovered near six-week highs versus the dollar on Tuesday, matching the euro ahead of a key EU summit, but vulnerable as Bank of England Monetary Policy Committee members prepare to testify on the resumption of quantitative easing.
Sterling rose to its highest since early September on Monday as markets anticipated a positive outcome from Wednesday's EU summit at which euro zone leaders are expected to detail plans to leverage the region's bailout fund and recapitalise the banking system in response to its deepening debt crisis.
"No one wants big positions on ahead of the EU summit so volumes are fairly light in sterling right now," said Chris Walker, currency strategist at UBS.
"It will be driven by swings in risk appetite in the short term but structurally I think levels above $1.6000 are an opportunity to sell," he said, adding that a disappointing outcome to the summit would hit the euro and sterling hard.
Sterling was close to flat for the day at $1.5978 against the dollar after rising to $1.6008 on Monday.
Traders reported offers at $1.6020 with resistance highlighted at $1.6043, the 100-day moving average.
On the downside traders reported bids in the $1.5900 region, placed ahead of support at $1.5887, the 50-day moving average.
The euro was close to flat for the day against sterling at 87.00 pence , confined within its recent range.
Traders highlighted offers at 87.30/50 and into this month's highs around 88.00, with downside stops reported in the 86.60 area.
The Treasury Select Committee will discuss the Bank of England's decision to undertake more quantitative easing with Governor Mervyn King and Deputy Governor Charles Bean from 0845 GMT.
Among the issues to be discussed are the effectiveness of QE, the case for using the same tool a second time, and the respective roles of the Treasury and the Bank in implementing measures to stimulate the economy.
"We will likely see some dovish comments from the MPC members and could see some downward pressure on GBP early this morning," said Lloyds analysts in a note.
UK current account data for the second quarter is scheduled for release at 0830 GMT, with economists in a Reuters poll forecasting a reduction in the deficit to 7.3 billion pounds from the previous 9.4 billion.
read more: Olympus Wealth Management
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