The pound held close to multi-month highs versus the euro and hit a fresh two-month high against the dollar as expectations for Bank of England (BoE) rate cuts and growing investor risk appetite supported the British currency.

Investors are awaiting key inflation data from major economies this week that could offer clues on the global interest rate outlook.

German inflation figures will be released on Wednesday and the wider euro zone's reading on Friday, along with the U.S. core personal consumption expenditures (PCE) price index - the Federal Reserve's preferred measure of inflation.

Sterling was flat at $1.2768 after hitting $1.2783 earlier in the session, its highest level since March 21.

The euro rose 0.14% against the pound at 85.14 pence per euro, after hitting 84.94 on Monday, its lowest level since August 2023.

Strong services inflation in the April data and other key economic indicators on both sides of the Atlantic shifted expectations for the BoE's first rate cut firmly until after August, strengthening the view that monetary policy will not be a headwind while appetite for risky assets can still boost sterling, analysts said.

They also mentioned the pound’s correlation with the U.S. stocks indexes. S&P 500 future contracts inched higher on Tuesday, with Wall Street reopening after a long weekend.

Money markets fully price in 25 basis points of BOE monetary easing in November, a 60% chance of such a move in September and a 40% chance in August.

"The pound is looking expensive versus the euro at current levels, in our view," said Francesco Pesole strategist at ING.

"We still expect an August cut, and see any views for delayed easing due to the UK vote as misplaced," he added.

Investors expect the outcome of the July 4 UK general election will not significantly influence the British currency.

Analysts stressed that both Labour and the Conservatives have emphasised that they will stick to the existing fiscal rules overseen by the independent Office for Budget Responsibility.

British Prime Minister Rishi Sunak is facing a mass departure of lawmakers, with the number of resignations surpassing the level the Conservative Party suffered before a landslide defeat in the 1997 election.

(Reporting by Stefano Rebaudo; editing by Kim Coghill)