By Joice Alves
LONDON (Reuters) -Sterling surged more than 1% against a weakening U.S. dollar on Monday supported by improved risk sentiment as markets scaled back some of their bets on Federal Reserve rate hikes.
The pound climbed 1.3% to a one-week high of $1.2032, at 1453 GMT, after touching its lowest since March 2020 on Thursday. Against the euro, sterling rose 0.25% to 84.79 pence.
The greenback retreated and stocks rallied as several Fed officials signalled they did not favour stepping up the pace of rate hikes. [FRX/]
"The U.S. dollar is on the back foot... as fears of a 100 bps (basis point) rate hike from the Fed recede and risk appetite improves. This has provided some support for cable," said Jane Foley, head of FX strategy at Rabobank London.
But political uncertainty and recession fears will continue to weigh on the pound, traders said.
The race to become Britain's next prime minister was at full steam on Monday, in what has become an acrimonious and divisive contest to replace Boris Johnson.
Foley said investors will be watching closely this week’s UK Financial Services bill "in the hope that greater incentives to investors will not be de-stabilised by any undue move away from regulatory prudence".
The focus will turn to UK data later in the week, with jobs and inflation figures expected on Tuesday and Wednesday, which could give more clues to how the Bank of England will act to try to tame surging inflation. Headline CPI is expected to have accelerated to 9.2% year-on-year in June.
The BoE is grappling with soaring inflation and a cost-of-living crisis, having raised rates five times since December as it tries to stop the surge in inflation from becoming embedded in Britain's economy.
BoE policymaker Michael Saunders, who has backed a bigger interest rate rise than most of his colleagues, said Bank Rate could reach 2% or higher during the next year.
In a data heavy week, traders will also be watching retail sales and flash PMIs figures in Britain, which could add to recession fears.
(Reporting by Joice Alves. Editing by William Maclean and Jonathan Oatis)