Sterling hit a fresh 23-month high and rose versus a weakening dollar on Thursday, still supported by expectations of rate rises, but with analysts questioning if the Bank of England (BoE) will be able to provide a hawkish surprise at its February meeting.
Money markets currently price in more than 100 basis points (bps) in interest rate rises in 2022 IRPR and an 87% chance of a 25 bps increase in February, after data showed on Wednesday that UK inflation rose faster than expected to its highest in nearly 30 years in December.
Domestic politics did not hurt sentiment, although Prime Minister Boris Johnson was fighting to save his premiership amid a deepening revolt inside his party over a series of lockdown parties in Downing Street.
Sterling rose 0.3% against the euro to a fresh 23-month high at 83.07 pence at 1528 GMT.
"If anything, there is a risk of the BoE disappointing the market by acting less decisively" at its February meeting, Commerzbank analysts said, adding "a lot has already been priced in" in terms of future rate rises.
"The market's rate speculations might be able to provide a little more support. However, the risk of profit-taking is likely to rise," they added.
On the broader market, commodity prices boosted riskier currencies while the dollar index edged lower.
The pound was up 0.15% against the greenback at $1.3636.
