LONDON (Reuters) -The British pound edged higher against the U.S. dollar on Tuesday but slipped against the euro as the single currency rose off multi-year lows.
The pound dropped as low as $1.3083 during early European trade before paring losses and trading higher at $1.3121 by 1519 GMT.
Against the euro, sterling was lower by 0.2% at 82.94 pence after reaching its strongest level against the single currency since June 2016 on Monday.
With limited domestic drivers, moves in the pound have been driven by the broad risk tone and developments in Ukraine, according to analysts at Scotiabank, who highlight that Bank of England policymakers are set to enter the blackout period ahead of an interest rate decision on March 17.
"We expect a 25bps hike then, but so do markets and economists, so the focus will be on how quickly the bank will increase rates (continue with back-to-back hikes?) and how high it is willing to take the bank rate," Scotiabank said.
Money markets are currently fully pricing in a 25 basis point rate increase at the BoE's March meeting and Scotiabank thinks a larger increase of 50 basis points is unlikely given geopolitical risks.
"These risks will continue to drive the GBP through the rest of the week," Scotiabank added.
Meanwhile, two surveys showed people in Britain spent heavily in February after COVID-19 restrictions were eased, but the outlook looks increasingly uncertain as inflation increases.