Sterling eases, but remains near to 10-month peak

By Alun John

LONDON (Reuters) - The pound dipped on Wednesday, but remained close to its 10-month high against the dollar hit the day before, as improving economic circumstances have helped sterling to be one of the biggest beneficiaries of the softening U.S. currency.

The pound was last down 0.27% against a broadly rebounding dollar at $1.2466, having hit $1.2525 a day earlier, its highest since June 2022.

The pound rallied roughly 2% against the dollar in the first quarter of the year, the most in the G10 and outpacing gains by other major European currencies.

British economic data has largely come in slightly better than feared, the latest example being strong service sector activity data, released Wednesday.

That in turn has driven market expectations of more interest rate hikes from the Bank of England (BOE) as it seeks to rein in inflation, underscored by remarks from policy makers.

The BOE still cannot be sure that it has raised interest rates enough to tame inflation, Huw Pill, the central bank's chief economist said on Tuesday.

Markets are currently pricing in another 40 basis points in rate hikes this cycle.

"UK rate expectations have repriced in recent weeks on the back of perceived renewed hawkishness among BoE officials," said analysts at Manulife, setting out their expectations for markets in the second quarter.

"The BoE's dynamic stance is offering support to the currency as policymakers adjust to domestic data as well as developments in the outlook for global rate expectations."

The pound has also been firming against the euro, though not nearly as dramatically as against the dollar. Sterling softened slightly on Wednesday, with the European common currency up 0.15% to 87.85 pence.

The pound strengthened to as much as 87.3 pence on Tuesday. A break past mid March's 87.19 would see the pound at its strongest against the euro since December.

(Reporting by Alun John; Editing by Sharon Singleton)