By Elizabeth Howcroft
LONDON (Reuters) - Sterling held firm near a 13-day high against the dollar on Wednesday after a run of falling UK COVID-19 infections raised investor hopes that the Bank of England could be less dovish than expected when it meets next week.
Although infection numbers rose again on Wednesday for the first time in a week compared with the previous day, they were still lower week on week and there was little reaction from the pound.
British Prime Minister Boris Johnson has advised against drawing conclusions from the data, saying it was too early to assess whether there was a definite trend.
England scrapping quarantine rules for fully-vaccinated visitors from the European Union and United States was also cited as a factor in the pound's gains.
At 1550 GMT, the pound was flat on the day versus the dollar, at $1.38795.
Versus the euro, it was up around 0.1% at 0.85075, having briefly crossed the key 0.85 level for the first time since April earlier in the session.
Elsewhere currency markets were generally cautious ahead of the U.S. Federal Reserve meeting later in the session. Markets are waiting to see if the Fed will provide any clues on the timing of any slowdown in its bond-buying programme, amid surging U.S. inflation.
"It’s been a good week for sterling, reflecting the fact that virus cases have gone down rather than up," said Colin Asher, senior economist at Mizuho in London. "If we roll into next week's BOE meeting with (daily) cases below 10,000 then the BOE may be less cautious than was expected.
"We will probably see upgrades to BOE forecasts on inflation and growth. I think UK data is strong enough to expect that QE could be terminated early,” Asher added, referring to the quantitative easing or bond-buying scheme.
SHIFT IN RHETORIC
The Bank of England looks set to keep its stimulus running at full speed next week despite two policymakers breaking ranks to suggest that its nearly 900 billion pound ($1.2 trillion) QE programme might have to end early as inflation speeds up.
Stuart Cole, head macro economist at Equiti Capital, said the fall in COVID-19 cases and more optimism for growth in the second half of the year were raising expectations for a shift in the monetary policy committee's rhetoric.
Bank of England interest-rate setter Michael Saunders could possibly vote to curtail the bond-buying programme, Cole said.
Speculators went net short on the pound for the first time since December 2020 in the week up to last Tuesday, CFTC data showed on Friday.
"GBP is heading into next week’s Bank of England meeting with a balanced positioning, which may be allowing some hawkish speculation to emerge," wrote ING strategists in a note to clients.