Sterling edged higher versus the dollar on Wednesday with markets cautiously optimistic euro zone leaders will unveil a comprehensive plan to tackle the bloc's debt crisis later in the week, holding out hope of a boost for most currencies against the dollar.
Moves in equities and riskier currencies were being driven by swings in sentiment ahead of the summit beginning with a working dinner on Thursday evening.
A clear sign that EU leaders are closing in on a fiscal agreement which will ensure that countries in the region manage to cut their debts would boost sterling against the dollar but would also likely benefit the euro against the pound.
"Sterling and the dollar remain closely tied and I don't think we'll move far away from $1.56 in the near-term." said Adrian Schmidt, currency analyst at Lloyds Banking Group.
"I think the risks for sterling are with some more positive sentiment coming up to the EU summit that it could lag the euro and the 86.15 level which has acted as resistance recently will give way," he added.
Sterling was up around 0.1 percent for the day against the dollar at $1.5610. Technical analysts highlighted resistance at $1.5740, the 55-day moving average, with support around Tuesday's lows in the $1.5560 area.
The euro traded up around 0.2 percent against the pound at 86.12 pence, with a break above 86.20 potentially exposing the 55-day moving average at 86.46.
WEAK ECONOMY
UK manufacturing and industrial production data are due for release at 0930 GMT. Manufacturing output is forecast to have fallen in October after September's rise of 0.2 percent. The euro zone crisis has eroded confidence and domestic demand is weak.
Analysts predict the manufacturing sector will continue to contract in the coming months as global demand stays soft.
UK economic woes came back into focus on Tuesday as a British Retail Consortium survey showed retailers last month suffered their biggest annual drop in like-for-like sales since May.
Sterling had been supported versus the euro in recent weeks by investors switching out of euro zone government debt into UK gilts, although some analysts say this flow could dry up if the UK economic picture worsens.
Many in the market believe ongoing signs of weakness in the UK economy will put a dampener on the pound as a fragile economy will require the Bank of England to continue buying assets from the market, which involves flooding the market with the currency.
The BoE announces its latest monetary policy decision on Thursday with most in the market expecting no change for now and greater focus to be placed on the February inflation report.
"Near-term inflationary pressures have remained elevated across a wide range of goods and services. If inflation does not drop as sharply as expected in the next few months, then we would expect a lively discussion on the MPC over the wisdom of extending QE in February, and further extensions beyond that would seem unlikely." said Barclays analysts in a note.
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