Sterling hit a five-month high against the dollar on Wednesday, boosted by ongoing optimism that the economy is over the worst of the recession.
The UK currency was helped higher by broad losses in the U.S. dollar and as investors took heart from the fact that the minutes to this month's Bank of England's policy meeting contained no unpleasant surprises.
The underperformance of stocks capped sterling's gains versus the dollar and pushed it lower against the euro, however, with the FTSE 100 index down 0.6 percent as financial stocks retreated after recent hefty gains.
The BoE report revealed a unanimous vote to extend its quantitative easing programme by 50 billion pounds and a debate on whether to expand it by 75 billion. This caused a very brief dip in the pound which was rapidly reversed.
"The key for sterling is that we have seen some signs of improvement in the UK banking sector and we are beginning to see signs of economic data improving," Bank of Scotland Treasury currency strategist Naeem Wahid said.
"Overall the minutes were broadly in line with the Bank of England's quarterly Inflation Report, so the reaction to the small talk of a greater amount of quantitative easing was very limited," he said.
Meanwhile, a survey by the Confederation of British Industry on Wednesday showed British manufacturing orders fell slightly more than expected but firms were more upbeat about the future than at any time since last September.
At 12:22 p.m., sterling edged up 0.1 percent against the dollar at $1.5480, having earlier hit a five-month high of $1.5538.
Analysts and traders said the next target for sterling is its 200-day moving average against the dollar at around $1.5550. A breach of this would pave the way for a move towards its mid-December high around $1.5724, they said.
"We are beginning to see an upward trend forming in sterling," Bank of Scotland Treasury's Wahid said.
The euro reversed earlier falls against sterling, however, trading up 0.2 percent at 88.23 pence.
Going forward, investors will be looking to the minutes from the April policy-seeing meeting of the U.S. Federal Reserve later in the day, as well as UK retail sales and public finance data on Thursday.
Any further hints of an improvement in the global economy would further dent the U.S. dollar as market players continue to shun safer currencies in favour of those that are perceived to be higher risk, including sterling.
"The IMM speculative account data shows that the market remains net short sterling with ample room to buy the currency as, despite (Bank) Governor King's reservations, the signs that the worst if the economic slowdown is in the past, mount," Calyon analysts said in a note to clients.
