Sterling hits fresh 5-month high versus euro, BoE in focus

By Stefano Rebaudo

Feb 4 (Reuters) - Sterling rose to a fresh five-month high against the euro on Wednesday, though investors remained on hold ahead of the Bank of England's policy meeting later this week. British interest rates are likely to fall further this year, but the BoE will probably sound vague this week about when or by how much ?it will cut borrowing costs as it awaits a clearer picture on inflation.

The single currency hit its lowest since August 27 ?against the pound at 86.15 pence and was last down 0.09% at 86.21 pence.

The U.S. dollar ?edged lower against the euro as a delay in releasing key jobs ?data due to a ?partial government shutdown added to uncertainty over the Federal Reserve's policy path.

The British currency was roughly unchanged at $1.3702.

Strategists at Barclays ?argued in a research note that the euro/sterling now ?is "fairly close to rate differential-consistent levels," after the process of fiscal risk premium unwind for is over.

Post-budget economic data have registered a notable bounce, consistent with the improved ?fiscal outturn for December.

"The stronger pound reflects ?both a reduction ?in UK fiscal and political risks after the Budget was released, and building evidence of a pick-up in growth momentum in the UK as uncertainty has faded," said Lee Hardman, ?senior currency economist at MUFG. Activity in Britain's services sector grew strongly in January and confidence rose, a survey showed on Wednesday, but firms also reported a jump in their prices.

"For the BoE, a pause by the Monetary Policy Committee at 3.75% is widely expected and the messaging is unlikely to matter much for the pound other than additional easing is to come," said Paul Mackel, ?global head ?of forex research at HSBC. "ECB President Lagarde will likely emphasise there is not a forex target but may hint at how the U.S. administration's policies could create a ?stronger euro," he added, after recalling that the euro's strength is expected to take centre stage at this week's policy meeting.

Traders priced in 35 bps of BoE rate cuts by year-end, implying one 25 bps move and a 40% chance of an additional cut. They also indicated European Central Bank policy rates stable through early 2027.

Political risks also linger in the UK in relation to Prime Minister Keir Starmer's position, starting with the Gorton ?and Denton by-election on 26 February and culminating with the May local elections. Opinion polls put Reform UK ahead of both Prime Minister Keir Starmer's Labour Party and Kemi Badenoch's Conservatives, the two parties that have dominated British politics for over a century, ?though a national election is not due until 2029.

(reporting by Stefano Rebaudo; editing by Leroy Leo)