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Sterling heads back towards 2-1/2 month highs on rate appeal

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LONDON, Jan 17 (Reuters) - The British pound edged higher on Monday, nearing a 2-1/2 month high, as investors ramped up bets that the Bank of England will raise interest rates as early as next month.

Recent data has raised expectations the British economy is rebounding strongly from the pandemic.

GDP data on Friday showed the economy is bigger than what it was before the first COVID-19 lockdown while employment data on Tuesday is expected to be robust. read more

Money markets are fully pricing in one rate hike by next month and one full percentage point increase in interest rates by the end of 2022.

Against the U.S. dollar, the pound edged 0.1% higher at $1.3689. It hit a late-October high of $1.3749 last week. It was broadly steady versus the euro at 83.51 cents.

The pound has rallied nearly 4% since the December lows as broader currency markets have been lifted by a more optimistic global growth outlook which has resulted in a swing in trading positions by hedge funds on the pound.

The Fed's recent hawkishness has also boosted the pound's appeal as investors bet it would give the Bank of England greater confidence to raise interest rates and tighten policy.

"The Fed’s shift towards more aggressive policy action will likely push the market to expect similar moves from central banks like the BoE that were already taking steps in that direction," Goldman Sachs strategists said.

"Within this context, it is also worth noting that the Fed’s apparent preference for earlier balance sheet action makes the BoE’s own runoff plans less idiosyncratic, which we though could have held back GBP’s response to policy action," they said, lowering their euro/pound forecast to 83 pence over the next three months from 86 pence earlier.

Reporting by Saikat Chatterjee, editing by Ed Osmond
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