LONDON (Reuters) - The British pound rebounded against the U.S. dollar on Wednesday as a drop in oil prices and an upswing in sentiment pushed the greenback rally triggered by Russia's invasion of Ukraine into reverse.
European and U.S. stock markets were staging a tentative rebound after four straight sessions of heavy losses with investors bargain hunting again amid fresh yet shaky optimism about a diplomatic solution to the conflict.
The pound was up 0.48% at $1.3165 at 1607 GMT while the dollar index lost over 1% against its main currency rivals.
The euro, also boosted by speculation of a new defence and energy stimulus package from the European Union, was the main beneficiary of the session's risk-on sentiment, rising about 1.4% against the dollar.
The pound itself retreated 0.94% to 83.93 pence against the euro, stepping away from a 5-1/2-year high on Monday.
"Chatter earlier this week about joint bond issuance has helped support this week’s rebound in the euro, however it’s hard to see how the current move higher can be sustained unless there is something tangible to come out of tomorrow's summit, other than warm words", commented CMC Markets analyst Michael Hewson.
A two-day summit of European leaders is scheduled Thursday and Friday in Versailles, outside Paris.
Diverging policy expectations from the Bank of England and the European Central Bank have propped up the pound against the common currency in recent weeks.
Money markets are currently pricing a total of 157 basis points of interest rate hikes from the BoE before the end of the year with a hike next week. Meanwhile, a meagre 36 points for the ECB in cumulative rate hikes is priced for the remainder of 2022.