Sterling Rises Against Dollar and Euro Amid Market Changes

LONDON (Reuters) -The pound strengthened against both the dollar and the euro on Tuesday, largely due to weakness in both peers rather than major British news, which is fairly thin until Thursday's closely watched Bank of England meeting.

The pound was last up 0.2% on the dollar at $1.3323 helped by nervousness in markets hoping for trade deals between the U.S. and other countries which could reduce the effect of U.S. tariffs but may not materialise.

Sterling reached an over-three-year top on the greenback in late April, as fears about the health of the U.S. economy undermined the dollar, but had been dropping back on hopes of deals. Markets, however, are now reassessing that view once more. [FRX/]

The pound was also stronger against the euro, which was down 0.2% at 84.95 pence.

The pair were roughly flat in early trade, but the common currency turned lower after German conservative leader Friedrich Merz failed to secure enough parliamentary votes to become chancellor, throwing politics in Europe's largest economy once more into disarray.

As for Britain, the focus is Thursday's Bank of England meeting. Markets see a 25 basis point rate cut as all but certain, and will be focusing on any indications of policymakers' plans for later in the year.

"It's still going to be interesting, markets will be looking at the accompanying guidance, the tone, and whether there are votes for a 50 basis point cut," said Jane Foley, head of FX strategy at Rabobank.

Markets are currently pricing at least two more 25 basis point BoE rate cuts this year in addition to Thursday's move, and see a good chance of a third. 

Such bets are predicted on forecasts that British growth will be weaker this year than earlier expected, in part due to the impact of tariffs, and that inflation will slow.

Whether or not the BoE indicates that is its expectation could also move the pound.

The BoE said on Tuesday its announcement and economic forecasts will be delayed by two minutes and published at 1102 GMT rather than 1100 GMT, due to a national two-minute silence being held to commemorate the 80th anniversary of Victory in Europe (VE) Day.

(Reporting by Alun John, editing by Ed Osmond)