Sterling rises for a second day before central bank meeting

The pound rallied more than half a percent on Wednesday as investors trimmed their short bets before the Bank of England's policy meeting on Thursday where it may strike a relatively more confident tone than its peers.

European Central Bank chief Mario Draghi hinted at more policy easing this week and the U.S. Federal Reserve may strike a dovish stance at the outcome of a two-day policy meeting later on Wednesday. In contrast with the general caution displayed by other major global central banks, the Bank of England has struck a more confident stance on the outlook of the British economy and hinted at more rate hikes.

Market analysts said the prospect of more hawkishness from the Bank of England on Thursday is prompting investors to trim short positions on sterling built up in recent weeks. "The ECB was dovish yesterday and the expectation is the Fed will also be dovish while the BOE is still expected to sound relatively hawkish," said Lee Hardman, a currency strategist at MUFG in London.

"That divergence is possibly offering some near-term support for (the) pound." Bank of England policymakers have said that interest rates may need to rise sooner than markets expect, but traders are in no hurry to shift their expectations. Futures markets price in no rate increases until late 2020.

Twenty economists polled by Reuters all expected the bank's nine monetary policymakers to vote unanimously in favour of keeping borrowing costs unchanged at Thursday's monetary policy meeting. Against the dollar, the pound rallied more than 0.5% to $1.2633 and strengthened 0.4% to 88.78 pence versus the euro. The pound has fallen by 5% since early May, as concern grew that arch-Brexiteer Boris Johnson, the top contender to become the next British Prime Minister, will lead the country out of the European Union with or without a deal by Oct. 31.