Sterling hit a one-month high against the dollar today, bolstered by expectations of a UK interest rate rise in the next few months, before stumbling against tough technical resistance at those levels.
A run of robust data from Britain's housing market, as well as signs that retailers enjoyed relatively solid Christmas sales, have supported the view that the Bank of England will follow up last year's two rate increases with a move to 5.25 per cent in the first quarter of 2007.
But in the absence of any major UK data today, analysts said sterling could struggle to make further gains beyond the one-month high around $1.9750.
By 8.53am sterling was a touch softer from the New York close at $1.9712, retreating from a one-month high of $1.9751 hit earlier in the session.
The pound ended 2006 13.6 per cent higher against the dollar than it started, notching up its biggest annual gain since a rally of nearly 20 per cent in 1990.
Against the euro, sterling was 0.1 per cent softer at 67.33 pence after a rise of 2 per cent in the past year.
Versus the low-yielding yen, sterling hit an eight-year high of 234.65 yen.
After a quiet calendar on today, Thursday sees the release of December GfK consumer confidence and December CIPS/RBS Purchasing Managers' Index for the service sector.