Sterling rose against the dollar on Tuesday after data showed UK inflation ticked up as expected in March, while a smooth Spanish bill auction fuelled investor appetite to buy alternative currencies to the safe haven greenback.
The cautious improvement in sentiment towards the euro zone, aided by a more positive than expected German ZEW business survey, failed to boost the euro against the pound however, with the shared currency hovering close to last week's 19-month low.
Gains against the euro helped trade-weighted sterling climb to 82.4, to Bank of England data said. A rise beyond 82.4 would be the index's highest level since August 2010.
The risks facing the UK are coming from the euro zone, so good news for the euro zone is good news for the UK, said Paul Robinson, head of European FX research at Barclays Capital, referring to the Spanish bill auction and ZEW survey.
Data showed UK inflation inched up to 3.5 percent in March from 3.4 percent in February, and boosted sterling by reinforcing speculation the Bank of England will not inject more stimulus into the economy next month.
Sterling was up 0.3 percent at $1.5945, retreating from a day high of $1.5972 on selling by Swiss and U.S. investors, dealers said.
It met strong resistance from the 200-week moving average around $1.5958, and technical strategists said a weekly close above this level would be a strong bullish signal.
The next focus for sterling investors is BoE Monetary Policy Committee meeting minutes for March, due out on Wednesday.
While all nine members of the MPC are expected to have voted to keep rates on hold, the minutes will be scrutinised for any hint on whether policymakers would consider another round of quantitative easing when the current programme ends next month.
Concerns over Europe are increasing so they (policymakers) are going to continue to be dovish but we do not think there will be any more QE in May, so that should be moderately sterling supportive, said Barclays Capital's Robinson.
EURO EYES 82 PENCE
Spain sold slightly more than planned at the auction of 12- and 18-month bills, with the result taken as a positive by market players even though yields jumped.
Strategists said the more serious test would come on Thursday when Spain will sell longer-dated debt. The country has seen borrowing costs jump in recent weeks on concerns over its ability to meet budget targets.
The euro was last down 0.3 percent to 82.40 pence, with the Spanish auction results helping it pare some losses after falling to a session low of 82.31.
The common currency hovered within sight of Monday's 19-month low of 82.10 pence, but strong support for the euro was seen at the psychologically important 82 pence level.
Strategists said although sterling may test that level, it was unlikely to break through it this week unless the latest bout of contagion in the euro zone debt crisis intensified to spread beyond Spain.
The pound will benefit from safe-haven flows. But when you look at weekly and monthly charts you realise 82 pence is an important level, it has held for the best part of two years, said Kathleen Brooks, research director at Forex.com.
Brooks said a firm break in euro/dollar below $1.30 was also necessary for euro/sterling to fall below 82 pence.
(Editing by Louise Ireland)