By Elizabeth Howcroft
LONDON (Reuters) -Sterling strengthened slightly on Tuesday, helped by recent falls in COVID-19 infections in Britain, optimism around Britain's lockdown easing and market anticipation of hawkish signals when the Bank of England meets on Thursday.
The pound had a rebound after most lockdown measures in England were dropped on July 19, reaching as high as $1.3984 at the end of the month. Since then it has stayed mostly above $1.39.
The currency was up 0.1% versus the dollar, at $1.39 by 1435 GMT. Against the euro, it was 0.2% stronger, at 0.8536.
Lee Hardman, currency analyst at MUFG, said the rebound in the pound reflects optimism that the pandemic could be largely over by the Autumn.
"If cases continue to rise less than feared, it will reinforce confidence that restrictions are unlikely to be tightened significantly again, allowing the UK economy to continue rebounding strongly during the 2H 2021," he said.
But Kenneth Broux, FX strategist at Societe Generale, said that the cable rally was driven more by month-end flows last week and dollar profit-taking, as well as M&A activity.
Speculators' net short position on the pound also creates a fertile ground for sterling gains, Broux said.
On a quiet day for economic data, investors are looking ahead to the Bank of England meeting on Thursday.
The central bank is expected to maintain its nearly 900 billion pound ($1.25 trillion) bond-buying programme, although two policymakers have broken ranks to suggest that the time for tighter monetary policy might be nearing.
The BoE is expected to be among the first of the world's main central banks to begin the process of stopping stimulus support.
"If the MPC (monetary policy committee) splits, if it's a 6-2 vote or 5-3, that's going to give a signal and I think the market could rally on that," Broux said.
British 30-year and 20-year government bond yields , both fell to a six-month low on Tuesday, down by around 2 basis points on the day, reflecting investor appetite and a broader fall in U.S. Treasury yields.
Interest rate futures currently price in the BoE raising the benchmark Bank Rate to 0.25% from its current 0.1% by August 2022.
The British public's expectations for inflation over the coming year jumped to 3.1% in July in response to recent rising prices, although longer-term expectations remained stable, a monthly survey showed.
($1 = 0.7189 pounds)
(Reporting by Elizabeth Howcroft; Editing by Simon Cameron-Moore and Mike Harrison)