Sterling edges higher against dollar, slips versus euro

© Reuters. FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company’s headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

LONDON (Reuters) – The British pound edged higher against the U.S. dollar on Tuesday but was little changed against the euro after an earlier bounce in the single currency proved short-lived.

Sterling has been at the mercy of dollar strength in recent days, which led to the currency pair dropping to its lowest level since Nov. 2020 during Asia-Pacific trading hours on Tuesday.

The pound dropped as low $1.3079 before moving into positive territory at $1.3120 by 1026 GMT.

Against the euro, sterling was little changed at 82.83 pence after reaching its strongest level since June 2016 on Monday, in part due to diverging policy expectations from the Bank of England and European Central Bank.

The primary focus right now is the sharp rise in energy prices, according to analysts at Lloyds (LON:LLOY) Bank.

“The big question is whether central banks will primarily see this as a further indication of inflationary pressures that needs to be responded to with tighter monetary policy or as an escalation of the downside risks for economic growth,” Lloyds said.

Markets are still pricing in an interest rate hike from the Bank of England this month and a total of 145 basis points of tightening this year compared to just 25 basis points of interest rate hikes from the ECB in 2022.

Policymakers at the ECB are currently in their blackout period before Thursday’s policy announcement.

The BoE is set to enter its blackout period after Tuesday, ahead of the policy announcement on March 17, however, there are no scheduled speeches scheduled from BoE rate setters on Tuesday.

Meanwhile, two surveys showed people in Britain spent heavily in February after COVID-19 restrictions were eased.