Sterling Touches Recent Highs Against Dollar

The British pound has been edging up against the US dollar in recent weeks to within striking distance of a six-month high as investors await major central bank policy meetings this week, including that at the Bank of England (BOE).

The pound was trading at $1.2401 against the US dollar, officially reaching its highest level since mid-June at $1.2345. The currency also rose 0.1% against the euro to 86.15 pence after hitting a three-month high against the euro earlier in December.

Economists expect the BOE to add another 50 basis points to UK interest rates at the next meeting, despite the economy falling into a recession. Many economists believe the BOE is the most dovish in developed countries as it has resisted living up to market pricing for hikes for much of the year.

The British public's expectations for inflation over the medium term edged up last month – a source of concern for many BOE policymakers. Still, analysts don’t expect any major moves in the next few days as the next central banks’ policy meetings are very difficult to call. 

There are growing shoots of optimism for the pound as the market is currently pricing the worst-case scenario for the British economy, which some economists feel is overblown. Analysts expect that a peak in global interest rates, on the back of softening inflation pressure, could allow the pound to consolidate its gains against the US dollar.