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LONDON - Sterling hit its strongest level against the euro since before 2022's mini budget crisis on Wednesday, as the pound held steady while the single European currency dropped following German regional inflation data.
The euro dropped as much as 0.3% to 84.48 pence, its lowest since August 2022, also trading lower against the dollar, after the data, which analysts at Capital Economics said suggested "both German and euro-zone (harmonised consumer price) inflation may come in a bit lower than expected."
Versus the dollar the pound was steady at $1.2762 on Wednesday, just shy of a two month high hit the previous day.
The pound has been supported by signs that the British economy is picking up, while the Bank of England is unlikely to cut rates before August at the earliest. On a trade weighed basis it is at its highest since 24 June 2016, when Britain voted to leave the European Union, according to the latest BoE data, dated Friday.
"This could be cited as evidence of market participants embracing the end of the Conservatives time in power and a welcome of a new Labour government but in all likelihood this is more about yield!" said MUFG FX analysts in a note.
Following last week's inflation data, in which services inflation proved particularly sticky, markets pushed back their expectations for the first Bank of England rate cut, and now see September as the mostly likely start date, causing yields on British government bonds to rise.
Economic data, most recently Tuesday's showing British retail sales bounced back in May, were also supporting the pound, said MUFG.
"We continue to see a build-up of evidence pointing to a real GDP recovery that is more robust than expected as the UK finally works though the energy price shock from 2022-23."
The strength of the pound on a trade weighted basis is partly a function of currency weakness in Asia. The pound hit a nine month high on China's yuan traded offshore on Tuesday, and is at its highest since 2008 on Japan's embattled yen.
(Reporting by Alun John; Editing by Amanda Cooper and Ros Russell)