By Joice Alves
LONDON, Aug 5 (Reuters) - Sterling edged 0.5% higher on Wednesday against a broadly weaker dollar as the U.S. coronavirus relief package stalled in Congress and U.S. bond yields sank.
Sterling climbed back toward pre-pandemic highs and was advancing towards a five-month peak hit last week versus the greenback.
The British currency rose as much as 0.5% to $1.3133 against the dollar GBP=D3 by 1128 GMT and 0.1% against the euro at 90.22 pence EURGBP=D3.
The pound has had a strong recovery against the dollar in the past few months. It registered its biggest monthly rise in more than a decade in July, although Stephen Gallo, European head of FX strategy at BMO Financial Group, said the surge had more to do with the dollar's weakness than the pound's strength.
"It's all about the dollar," Gallo said. "Congress has not been a able to pass an aggressive fiscal stimulus package for the last month or so and you can roughly trace the beginning of the dollar fall to that."
Democrats in the U.S. Congress and White House negotiators are in talks on a new coronavirus relief bill after a deadline was missed on Friday to extend enhanced unemployment payments during the pandemic.
Even data showing that UK services and manufacturing grew at the fastest rate in more than five years last month had little impact on the pound, because all eyes are on the U.S. economy, Gallo said.
A Bank of England policy meeting later this week could bring some short-term volatility to sterling by disappointing investors looking for signs the central bank intends to cut interest rates, ING forex strategist Francesco Pesole said.
"There may be some volatility around the meeting, but we expect no key shift in language around the negative rate story."
"We don't think the Bank of England will have interest of totally excluding the possibility of negative interest rates, but at the same time they didn't want to show any commitment towards it," Pesole said.
Fears of a second wave of infections capped the pound's advance, after a new study said on Tuesday that a second wave of the pandemic could be twice as bad as the initial outbreak in Britain.
British Prime Minister Boris Johnson said last week he would postpone the next stage of lockdown easing for at least two weeks after infection rates picked up.
Growing pressure to strike a Brexit trade deal before a transition period ends in December is also making investors wary of the pound's prospects over the next few months.
(Reporting by Joice Alves, editing by Larry King)
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