LONDON- Sterling held at $1.35 on Wednesday, recovering from the three-week low hit in the previous session, as some calm in stocks led traders to buy back into hard-hit currencies even though renewed political uncertainty around Prime Minister Boris Johnson weighed on sentiment.

Sterling has dropped sharply in the past two weeks as panic in stock markets over the prospect of tighter interest rates encouraged investors to dump currencies deemed riskier.

By 0930 GMT, sterling traded at $1.35, down marginally on the day but significantly above the $1.3436 low touched on Tuesday.

Versus the euro, the pound was up 0.1% at 83.62 pence. Sterling has been a stronger performer against the single currency in 2022 as investors bet the European Central Bank will lag peers, including the Bank of England, in raising rates.

The BoE meets next week and markets expect a tightening for a second time since the pandemic hit, raising rates 0.25% to 0.5% as policymakers try to rein in inflation rates currently running at more than double the BoE's target levels.

The latest revelations about more parties held at Downing Street in 2020 and attended by Prime Minister Johnson while Britain was in a lockdown mean more political uncertainty, with Johnson fighting for his position ahead of the release of an official inquiry. Police have also opened investigations into the events. 

Analysts said Johnson's position looked at serious risk but should he be forced out, the pound was unlikely to move much in the medium term given the policies of the favourites to become his successor.

"While most Tory MPs have pledged to wait for the result of the investigations before moving to vote out Johnson, there now appears more consensus that the PM's tenure is close to its end," ING analysts wrote.

"Chancellor Rishi Sunak is currently seen as the most likely candidate to take over the role as PM: given no obvious implications for the UK economy or the Brexit stance for the moment, any change at the helm of the government should have a limited impact on the pound," they added.

(Reporting by Tommy Wilkes; Editing by Krishna Chandra Eluri) ((