* Chart: Global exchange rates in 2021 tmsnrt.rs/2egbfVh
* Chart: Trade-weighted pound sterling since Brexit vote tmsnrt.rs/2hwV9Hv
LONDON, Oct. 5 (Reuters) – The British pound hit a three-week high against the euro on Tuesday, recovering from a steep drop last week as traders turn their attention to the prospect of a rise interest rates in Great Britain.
Rising inflation expectations affected risk sentiment last week and saw bond yields soar higher, pushing the risk-sensitive British pound to a two-month low against the euro and its higher. low against the dollar since December 2020.
But at 08:25 GMT, the British pound was up 0.2% against the euro at 85.22 pence, after recovering to its highest level since mid-September.
The rally in the pound “looks surprising,” said Ulrich Leuchtmann, head of currency and commodities research at Commerzbank.
While the European Central Bank has no plans to hike rates anytime soon, the prospect of looming rate hikes, signaled by the Bank of England, is once again supporting the pound, Leuchtmann said in a note to clients.
“Given the large gap between the comments of the ECB and the BoE, one would expect the pound to be stronger,” he said.
The pound has gained nearly 5% against the euro this year, but caution must prevail, Leuchtmann said.
He said it was not clear whether the BoE could “give in” to the supply issues and abandon the idea of faster rate hikes.
UK supply chains for everything from pork, oil and poultry to medicines and milk have been strained by labor shortages since Brexit and the start of the COVID pandemic -19.
Analysts have signaled that the pound sterling does not appear to have reacted to the renewed risk of Brexit after Britain told the European Union on Monday that it would trigger safeguard measures in their divorce deal if the bloc did not not accept changes to facilitate trade with Northern Ireland.
European states have promised that they will announce measures in a few days to put pressure on London to respect the Brexit agreements.
Against the dollar, the pound was up 0.1% to $ 1.3620, not far from the week’s high hit the day before. (Edited by Timothy Heritage)