File picture: Reuters

London - Sterling hovered near its highest in a month against the dollar and the euro on Wednesday, supported by a narrowing trade deficit and prospects that economic recovery will put pressure on the Bank of England to tighten policy.

The International Monetary Fund sharply upgraded its forecasts for British growth on Tuesday, lending robust support to the pound.

The IMF now forecasts the economy to expand at 2.9 percent in 2014 before easing to 2.5 percent next year.

That was up from previous forecasts of 2.4 and 2.2 percent, respectively.

Sterling hit a one-month high of $1.6765, up nearly 1 percent so far this week, with traders citing selling by a reserve manager in afternoon trade that limited gains.

Chartists cite resistance at the March 7 high of $1.6787, with a rise above that taking it to its highest since mid-February.

The focus shifted to the minutes of the latest Federal Reserve meeting to be released later on Wednesday.

They are likely to show that members of the Federal Open Market Committee generally agreed on tapering the Fed's bond-buying programme.

More importantly, traders will look for clues about the interest rate cycle, given mixed signals from several recent Fed speakers.

Sterling was steady against the euro.

The latter slipped to 82.315 earlier in the day, its lowest since March 6.

It was last trading at 82.40 pence.

The latest piece of positive news for sterling came from a narrowing of the trade deficit in February, although traders and strategists said that given the sharp rise in the pound in recent sessions, it could face some profit-taking.

“It was a good headline number, but a trade deficit of over 9 billion pounds is still significant,” said Jeremy Stretch, head of currency strategy at CIBC World Markets.

“And while the narrowing gap is supportive of the pound, we could see some profit taking, given the pound has risen pretty sharply in the past few days.”

The pound had jumped on Tuesday after data showed UK industrial output rose much faster than forecast in February.

That data was followed by more good news when leading economic research body NIESR said Britain's economy looked to have grown at its fastest quarterly rate since early 2010 during the first three months of this year, faster than many analysts had been predicting.

The output data, the IMF upgrade and the NEISR update added to the belief that a rise in official rates could come sooner rather than later next year.

“We stay long sterling/dollar as a trade recommendation,” said Manuel Oliveri, currency strategist at Credit Agricole.

“We expect the pair to trade up to $1.70 and above.”

The BoE's monetary policy committee started its two-day meet on Wednesday and it is widely expected to keep rates at record lows and its asset buying programme unchanged.

It is likely to keep policy accommodative at least until the spring of 2015 because of remaining doubts about the sustainability of the recovery. - Reuters