LONDON - Sterling rose against the dollar on Wednesday following three days of losses, and headed for its largest monthly gain since 2020, despite Britain's persistently gloomy economic outlook.
At 1028 GMT the pound was up 0.48% against the dollar at $1.20100. Meanwhile sterling rose 0.25% to a session high versus the euro at 86.23 pence, after data showed euro zone inflation cooled off by more than expected in November, reinforcing the case for a slowdown in European Central Bank rate hikes next month.
The pound touched a three-month high of $1.2153 against the dollar on Nov. 24, having recovered from a trough at the end of September in the aftermath of Liz Truss' mini-budget.
It's risen 4.6% in November, its biggest one-month gain against the dollar since July 2020.
But fears of a lengthy UK recession are still weighing on sentiment, with the pound down 11% this year.
Market players are pondering the Bank of England's (BoE) next move, with the Monetary Policy Committee, the BoE's rate-setting body, expected to increase rates by 50 basis points < IRPR>, with a lesser 25% chance of a 75 basis point hike according to Refinitiv data.
"We're keeping a close eye on the BoE, but soon the focus will shift to the state of the real economy," said Simon Harvey, head of FX analysis at Monex Europe.
The central bank has been hiking rates since late 2021 to try to bring down soaring inflation without damaging the economy too much in the process.
"I think that migration of investors focus to that will start towards the end of the year, leaving upside in the pound rather limited unless there is a substantial improvement in risk conditions."
FX traders remain focused on a speech from Federal Reserve Chair Jerome Powell, due in Washington at 1830 GMT on the economic outlook and the labour market.
"We're primarily looking at how the dollar will trade given Powell this evening. FX markets will likely take the cue of rates," said Harvey.
(Reporting by Lucy Raitano)