© Reuters. British pound coins are seen in front of displayed stock graph in this illustration taken, November 9, 2021. REUTERS/Dado Ruvic/Illustration

By Stefano Rebaudo

(Reuters) – Sterling edged up on Thursday ahead of Bank of England and European Central Bank policy decisions, with investors keen to see if the rapid spread of the Omicron coronavirus variant stays the BoE’s hand despite a sharp rise in inflation.

The dollar was slightly lower in choppy trade after the Fed said on Wednesday it would double the pace at which it reduces its bond purchases.

The European Central Bank is all but certain to dial back stimulus one more notch later on Thursday, while pledging to keep borrowing costs exceptionally low.

Sterling was up 0.15% at 85.05 pence against the euro and up 0.2% at 1.3291 against the dollar.

Early trade was subdued as investors awaited the BoE at 1200 GMT and the ECB at 1245 GMT.

“If the BoE were to hike its key rate in a surprise move today, that would be positive for sterling,” Commerzbank (DE:) analysts said in a note to customers. But it added: “BoE comments suggest that it will allocate more significance to the pandemic at today’s meeting.”

Hospitalisation rates are rising in some areas in Britain as the Omicron variant sparks a wave of new infections, England’s top health official said on Wednesday as he warned that the number of cases would break records in the next few weeks.

If the Bank of England doesn’t hike rates, the pound’s reaction “will depend on how concerned BoE sounds about the question of inflation and whether it signals a February rate hike,” Commerzbank added.

Data on Wednesday showed British consumer price inflation leapt by far more than expected and hit a decade-high 5.1% in November.

Political risks continue to weigh on sentiment as Prime Minister Boris Johnson faces turmoil in his Conservative Party over measures to curb the outbreak’s spread and a public outcry over alleged parties at his Downing Street office during last year’s lockdowns.

Johnson’s government sought to play down the biggest rebellion yet from his own party’s lawmakers on Tuesday, with one minister saying it was not surprising that there were different views over pandemic restrictions.

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