Sterling edges up, rate divergence and market sentiment in focus

By Stefano Rebaudo

Feb 25 (Reuters) - Sterling edged up against the dollar and the euro on Wednesday, with investors keeping a close eye on interest-rate divergence and market sentiment.

Investors stayed on the sidelines ahead of ?Nvidia results due later in the session, while ?an uncertain UK political backdrop and the prospect of further Bank of England rate cuts left the ?near-term outlook for the pound unfavourable.

The pound tends to behave as ?a risk-sensitive currency, with a strong correlation to global ?equities.

BoE Governor Andrew ?Bailey said on Tuesday that a March rate cut was possible, although he noted that ?services price inflation had not eased as ?much as hoped in recent data.

The BoE turned more dovish in early February, when it held policy steady in a ?surprisingly tight 5-4 vote and ?said rates would ?likely fall if a decline in inflation continues.

Sterling was up 0.10% versus the euro at 87.17 pence. It hit 87.52 last week, ?its lowest since December 19.

It was up 0.18% at $1.3511.

Gilt yields ?are under scrutiny ahead of next week's bond issuance plans from the UK Debt Management Office, which will follow finance minister Rachel Reeves' updated growth and borrowing forecasts to parliament.

British 10-year yields rose two basis points on Wednesday ?after ?falling to their lowest since December 2024 at 4.29% on ?Tuesday.

Dani Stoilova, UK and Europe economist at BNP Paribas, expects the Office ?for Budget Responsibility to confirm indirectly that the government remains compliant with fiscal rules.

"Risks around the fiscal trajectory have not dissipated though, particularly given the backdrop of elevated political uncertainty, and will need to be addressed in future budgets," she added.

Prime Minister Keir Starmer, who has faced calls to step down over his appointment of Peter ?Mandelson as UK ambassador to the U.S., faces further scrutiny after parliament ordered the release of documents relating to the vetting of Mandelson, who was later ?fired for his links to ?the late sex offender Jeffrey Epstein.

(reporting by Stefano Rebaudo. ?Editing by Mark Potter)