LONDON, Oct 5 Reuters - The currency rose on Tuesday to a three-week high against the euro, recovering from a sharp sell-off last week as traders turn their attention to the prospect of interest rate increases in Britain.
Rising inflation expectations hit risk sentiment last week and saw bond yields climb higher, pushing risk-sensitive sterling to a two-month low against the Euro and their lowest level against the dollar since December 2020.
Aber by 1127 GMT, sterling was 0.3% higher against the Euro at 85.14 pence, having revived its lowest level since mid-September.
Sterling’s recovery seems unexpected said Ulrich Leuchtmann, head of the FX and commodity research at Commerzbank.
While the European Central Bank has no plans to raise rates soon, the prospect of imminent rate hikes, signalled by the Bank of England, is lending support to the pound again, Leuchtmann said in a note to clients.
In view of the significant discrepancy between BoE and ECB comments, one should expect sterling to be stronger, he said.
The pound has gained nearly 5% against the Euro this year, but Leuchtmann called for cautious as it was unclear whether the BoE might cave in the face of supply problems and abandon the idea of more rapid rate hikes.
The final reading of the IHS Markit CIPS composite Purchasing Managers' Index showed strong growth for companies in September, but post-Brexit shortages of staff, raw materials and transport led to slower growth in new orders.
Analysts flagged that the pound was not reacting to new Brexit risk after Britain has told the European Union on Monday it would trigger safeguard measures in their divorce deal if the bloc fails to agree to changes to smooth trade with Northern Ireland.
European states have promised to announce measures within days to apply pressure on London to abide by Brexit agreements.
Versus the dollar, sterling topped to $1.3622 was 0.1% higher at $1.3622, not far from the previous high of the week, touched the previous day.