Sterling hits new highs against dollar, flat versus euro

By Stefano Rebaudo

(Reuters) -Sterling rose to new highs against the dollar while it was almost unchanged versus the euro, with investors focused on potential rate increases from the Bank of England.

The pound has strengthened recently as investors ramped up expectations of further rate rises, while Britain's focus on rolling out booster vaccinations rather than returning to coronavirus lockdown measures boosted risk sentiment.

Sterling did not appear to be affected by political problems facing Prime Minister Boris Johnson, who apologised in parliament for attending a garden drinks gathering at his official residence during a lockdown in May 2020.

The pound rose 0.4% against the dollar, hitting its highest level since Nov. 4 at $1.3695 overnight.

The greenback fell to a fresh two-month low after data showed U.S. consumer prices rose solidly in December, but in line with economists' expectations.

Sterling was up 0.05% versus the euro at 83.44 pence, after touching its highest level versus the single currency since February 2020 on Tuesday.

“The pound remains better positioned as long as markets continue to see prospects of a further aggressive tightening by the Bank of England this year,” Unicredit analysts said.

Markets are pricing in an almost 80% chance of a 25 bps rate hike in February.

“Markets seem very sceptical to price-in any political instability in the UK, with the pound still scoring as the best performing currency of 2022,” ING analysts said.

It emerged on Tuesday that Johnson’s private secretary had invited more than 100 people to a "bring your own booze" party at the prime minister's official residence during a coronavirus lockdown.

“We continue to favour EUR/GBP downside and a break below 0.8300 in the near term, and another good day for risk sentiment would likely help the higher-beta GBP gain some more ground,” they added.

(Reporting by Stefano Rebaudo; Editing by Peter Graff)