Sterling holds firm after UK COVID-19 infections drop

* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv

By Elizabeth Howcroft

LONDON, July 28 (Reuters) - Sterling held firm in early London trading on Wednesday, close to a 13-day high against the dollar despite a broader tone of risk aversion in currency markets ahead of a U.S. Federal Reserve meeting.

Caution ahead of the Fed meeting later in the session pushed the dollar index higher and mostly saw riskier currencies lose out, with a fall in Chinese equity markets also contributing to the "risk-off" moves.

But the pound was an outlier, mostly holding on to its recent gains. It saw a sudden surge on Tuesday around the time at which daily foreign exchange benchmarks are calculated.

At 0808 GMT on Wednesday, the pound was at $1.3869, close to its highest in 13 days. It was steady against the euro, having briefly strengthened to 0.84995 earlier in the session - crossing the key psychological 0.85 level for the first time since April.

Analysts attributed the pound's gains to COVID-19 cases in Britain declining over the last seven days, although British Prime Minister Boris Johnson advised against drawing conclusions from the data, saying it was too early to assess whether there was a definite trend.

Sentiment was also lifted by an expected lessening of travel restrictions.

The decline in infections "has very much put a dent into fears that had been growing that UK growth in H2 was going to be less than previously expected", said Stuart Cole, head macro economist at Equiti Capital.

"This sentiment had been weighing on sterling and as it has dissipated, so the pound has started to claw back some of its lost ground."

Most lockdown restrictions in England were lifted on July 19. 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.

"Sterling is the best performing G10 currency so far this week, as it detached from global risk appetite dynamics and may have been buoyed by a slowdown in UK Covid-19 cases, which is raising hopes that the government's decision to lift almost all restrictions may prove to be a sustainable approach," wrote ING FX strategists in a note to clients.

ING said that sterling may test the 0.85 level versus the euro today, as there may be some hawkish speculation about the Bank of England meeting next week.

The BoE 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) bond-buying scheme might have to end early as inflation speeds up. (Reporting by Elizabeth Howcroft; Editing by Alex Richardson)