LONDON (Reuters) - Sterling rallied on Monday against the euro and the dollar as an upbeat mood on broader financial markets helped the British pound and as traders prepared for a Bank of England policy meeting this week at which it is expected to again raise rates.
Investors have shifted to pricing in an 80% chance of a 50 basis point hike from the BoE, which will announce its decision on Thursday, as policymakers globally accelerate the pace of rate rises to fight soaring inflation.
The pound was little moved by survey data on Monday showing British manufacturing output and new orders declined in July at the fastest rate since May 2020, with expectations for a slowing economy priced in by many traders.
It extended an initial rise in later European trading to hit as high as $1.2274, up 0.7% on the session and its strongest since June 28. Against the euro, sterling rose 0.4% to 83.56 near a three-month high of 83.46 touched on Thursday.
"Expect a bit of a wait-and-see approach in GBP price action heading into Thursday's Bank of England rate announcement. A look at rate expectations shows that the market is now fully pricing in a 50-bps move, which is also our base-case scenario," ING analysts said in a research note sent out to clients.
"Still, we see a non-negligible risk of some pushback against the market’s hawkish pricing, which could trigger some weakness in the pound."
The pound has struggled versus the dollar in recent months, although its moves have mostly been driven by dollar-specific developments, such as a rush for safety and the Federal Reserve's more aggressive stance on tightening policy.
Versus the euro, sterling has held up far better. The single currency has been weighed down by concerns about a euro zone recession and the fallout from soaring natural gas prices and shortages.
(Reporting by Tommy Reggiori Wilkes; Editing by Kim Coghill and Nick Macfie)