PM Johnson's woes fail to crash sterling's party

By Julien Ponthus

(Reuters) -Sterling hit an 11-week high against a weakening dollar on Thursday as investors expect a February rate hike from the Bank of England to back the pound and see limited risks linked to Prime Minister Boris Johnson's party scandal.

The dollar lost ground against most rival currencies after data showed U.S. inflation was no hotter than expected in December, which prompted traders to cut crowded long positions.

In London afternoon trading, the pound reached a high of $1.3749, a level unseen since October 29 2021.

Against the euro, the British currency strengthened 0.12% to 83.38 pence and within striking distance of the February 2020 highs it touched versus the single currency on Tuesday.

Calls for Johnson to resign after he admitted attending a "bring your own booze" gathering at his official residence during Britain's first coronavirus lockdown had little adverse impact on the currency.

"With the UK ahead of other major developed economies in regard to the Omicron wave and the roll-out of booster jabs, GBP will likely see limited impact from the uncertainty over PM Johnson’s future", wrote MUFG Derek Halpenny in a note where he said he received clients enquiries on the matter.

"With the BoE on course to hike in February, positioning is likely to shift to longs and it will be the BoE that dominates GBP direction for now", he added.

Markets are pricing in an almost 100% chance of a least a 15 basis points rate hike in February.

Leaders of the opposition and voices within the Conservative Party have called for Boris Johnson to resign and bookmakers slashed their odds on him being replaced as prime minister this year.

For Berenberg's Chief Economist Holger Schmieding, there is a risk moving forward that the embattled prime minister might take a more confrontational stance with Brussels in order to prop up support among his Conservative backbench in parliament.

"Johnson may be tempted to take a particularly hard line against the European Union, for instance on Northern Ireland or fisheries", Schmieding speculated in a note.

"The result could be a period of elevated tensions between London and Brussels, with the risk that markets may worry about potential tit-for-tat sanctions that would hurt the UK economy (and Sterling) much more than the bigger EU", the economist added.

British foreign minister Liz Truss on Thursday resumed talks with the European Union to resolve post-Brexit disputes over trading rules, hosting EU commissioner Maros Sefcovic at her official country house.

(Reporting by Julien Ponthus; Editing by Angus MacSwan and Raissa Kasolowsky)