LONDON (Reuters) - Sterling rose almost 1 percent to an eight-week high against the dollar on Monday, gaining with other major currencies after the failure of a Republican healthcare bill weakened faith in U.S. President Donald Trump's other campaign promises.
At the start of a week set to include Britain's formal request to leave the European Union, the pound gained 0.8 percent compared with Friday's close in New York, reaching $1.2615, its highest since Feb. 2.
It also inched up 0.1 percent to 86.50 pence per euro, a squeeze on record high bets lodged against sterling in recent weeks helping it outperform other major developed world currencies with the exception of the yen.
The moves take it to the top of a $1.20-$1.27 range it has held since October.
"Really it has been a dollar story today, but just the weight of the short positioning and its relative illiquidity have made sterling the outperformer along with the yen," said Nomura analyst Jordan Rochester.
"$1.25 to $1.27 is the sell zone at the moment (for the pound). Whenever you get up to these ranges, you have selling demand come back in and we have already seen that this afternoon."
Sterling has been rising steadily since a Bank of England meeting on March 16 that saw a number of its members swinging towards concern over rising prices and its next move being a rise in interest rates to quell consumer inflation expectations.
But official U.S. futures market data on Friday showed net bets on the pound rising even further in the week to last Tuesday, a measure of the deeper concern among investors about Britain's path out of the EU over the next two years. [IMM/FX]
A number of major banks have predicted the pound will fall below $1.20 in the period of political jousting sparked by the launch of formal "Article 50" negotiations on the terms of a divorce expected to see it leave the European single market.
"Our near term bearishness towards the pound has been challenged by the constructive BoE message on rates," said Kamal Sharma, a strategist with Bank of America Merrill Lynch in London.
"But we don't think Article 50 is the last shoe to drop on sterling bearishness. From Wednesday, the narrative is out of (Prime Minister Theresa) May's hands and with the EU. That may put more pressure on the pound again."
Reporting by Patrick Graham and Jemima Kelly, editing by Ed Osmond