Sterling rises to 2-month highs on rate view

LONDON (Reuters) - The pound climbed to a two-month high on Wednesday as investors ramped up expectations that the Bank of England will raise interest rates as early as next month after a surprise hike in December.

And growing expectations that Britain will not introduce COVID-19 measures clamping down on economic activity was also boosting the stock market, with the benchmark index rising to its highest in nearly two years.

"Last night’s release of several research papers on Omicron's milder severity and now this morning talk of Boris Johnson not looking to tighten restrictions after (Christmas) is keeping the pound bid," Nomura strategist Jordan Rochester said.

Prime Minister Boris Johnson on Tuesday said that England could withstand a surge in COVID-19 infections without shutting down the economy as Britain reported another record daily high in cases fuelled by the Omicron variant.

Against the dollar, the pound edged up for a second consecutive day to $1.3564, its highest since early November.

The pound has also benefited from stronger stock markets. Kenneth Broux, a strategist at Societe Generale said the correlation between the pound/euro exchange rate and U.S. stocks has strengthened to its highest levels in nearly three months.

Some elements of short-covering on the British currency have also helped. Net short bets against the pound are at the highest levels since October 2019, according to latest data.

(Reporting by Saikat Chatterjee; Editing by Catherine Evans, Kirsten Donovan)