© Reuters. FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration/File Photo

By Dhara Ranasinghe

LONDON (Reuters) – The British pound held near its strongest levels since early 2020 against the beaten-down euro on Monday though it slipped against the dollar, which is being supported by bets on faster Fed policy tightening.

Sterling briefly touched 83.80 pence per euro, a new Feb. 2020 high against the single currency which was hit by Austria’s decision to reimpose a full COVID-19 lockdown. Against the dollar, the pound was a tad weaker at $1.3424, off the $1.3354 low hit last week.

Traders’ focus remains firmly on whether or not the Bank of England will raise interest rates at its December meeting.

In an interview with the Sunday Times newspaper, BoE Governor Andrew Bailey said his concern on the inflation outlook is that it could be “elevated for longer” but there is also a chance that inflation does not prove as persistent as feared.

“Market pricing for a December BoE rate hike was not materially impacted by BoE Governor Bailey’s somewhat dovish comments on the weekend,” analysts at CBA said in a note.

“Bailey noted that the risks to the BoE’s inflation forecasts were ‘two‑sided’. His comments suggest that there may be a higher hurdle to a December rate hike than many expect.”

The BoE wrong-footed many investors earlier this month when it did not lift rates from their record low 0.1%, following comments from Bailey in late October which markets interpreted as a signal that a rate hike was very near.

Since then, inflation has risen to a 10-year high of 4.2% and jobless data has not pointed towards higher unemployment after the end of the furlough scheme – a key concern that stayed the BoE’s hand in November.

Confusion over when the BoE will move has prompted hedge funds to dump sterling with funds the most bearish on the pound since June last year, according to the latest positioning data from Chicago futures markets.

Commodity Futures Trading Commission data shows that hedge funds and speculators increased their net short sterling position to 31,599 contracts in the week to Nov. 16 from 12,093 the week before.

Two weeks earlier, funds were net long more than 15,000 contracts, a collective $1.3 billion bet on the currency rising.

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