Sterling close to multi-year highs vs dollar, focus shifts to BoE, politics

By Stefano Rebaudo

Jan 29 (Reuters) - The pound hovered near multi‑year highs against the dollar on Thursday, with U.S. policy uncertainty keeping the greenback on the back foot as markets looked ahead to next week’s Bank of England decision and to developments on the UK political front.

The decision to keep Bank Rate unchanged this month may be less hotly debated given recent news of the strongest private sector business growth since April 2024 alongside unexpectedly strong retail sales and inflation rising further from the MPC's 2% target, according to economists polled by Reuters.

The greenback edged down against a basket of currencies as uncertainty over U.S. economic policies and geopolitical moves weighed on sentiment.

Sterling was roughly unchanged at $1.3802 GBP=D3, after hitting $1.36645 early this week, its highest since September 2021.

Matthew Ryan, head of market strategy at global financial services firm Ebury, noted that in the last few days “domestic news in the UK, namely expectations for Bank of England rates and the brewing civil war within the Labour Party,” has been completely overshadowed by headlines elsewhere.

British Labour Party politician Andy Burnham was on Sunday blocked from trying to return to parliament, with lawmakers on the left of the party accusing Prime Minister Keir Starmer and his allies of a political move to keep out a potential leadership rival.

Labour is trailing in opinion polls to Nigel Farage's right-wing populist Reform UK ahead of bellwether local elections in May.

The pound lost 0.05% against the euro to 86.60 pence. EURGBP=

“UK politics may well take its toll on sterling again over the coming months,” said Chris Turner head of forex strategy at ING, mentioning a UK by-election on 26 February.

There looks to be no upside for Starmer from a by-election in the pipeline in the Greater Manchester constituency of Gorton and Denton, as the Labour Party could lose a seat it won with a big majority in 2024.

“Sterling is also vulnerable to any further bond market pressure emanating from Japan or the U.S. In short, we think sterling is near the top of multi-quarter ranges,” ING's Turner added.