Sterling traded near multi-month highs on Wednesday as a softer US dollar supported the pound ahead of the Christmas holiday period.
Market activity was subdued, with thin trading conditions limiting large moves in major currency pairs.
The pound briefly climbed to $1.35335 in early trading, its strongest level since mid-September.
It later eased back slightly and was last trading just below that peak, broadly flat on the day.
Dollar weakness lifts sterling
The dollar’s decline against several major currencies helped underpin gains in the pound.
Similar patterns were seen across European currencies, with the greenback losing ground against the euro and others.
For sterling, the softer dollar has reinforced recent upward momentum following key central bank decisions.
Analysts say reduced liquidity ahead of the holidays has magnified the impact of recent macro signals.
Pound holds firm against the euro
Sterling also maintained strength against the euro during the session.
The common currency slipped to around 87.21 pence, its lowest level since mid-October.
It later recovered slightly but remained near those lows, leaving the pound close to its strongest level in two months versus the euro.
Traders noted that positioning remained cautious as many market participants had already scaled back activity for the year.
Bank of England remains central focus
The pound’s recent performance continues to be shaped by last week’s Bank of England meeting.
The central bank cut interest rates following a narrow vote among policymakers.
However, officials also signalled that the already gradual pace of easing could slow further.
That guidance has been interpreted as relatively supportive for the currency.
If rate cuts proceed more slowly, the pound could retain an advantage over currencies backed by more aggressive easing cycles.
Diverging paths with the Federal Reserve
Sterling’s outlook is also influenced by expectations for US monetary policy in 2026.
The Federal Reserve is widely expected to continue easing next year as inflation pressures cool.
That contrasts with the Bank of England’s more cautious tone, helping to support the pound against the dollar.
Analysts say this divergence could remain a key driver of currency moves in the early months of the new year.
Thin trading limits volatility
With the Christmas holiday approaching in Britain, trading volumes remained light across currency markets.
Many institutional investors have already reduced exposure until the new year.
As a result, price action has been relatively contained despite the pound’s strong levels.
Market participants expect volatility to pick up again once full trading resumes in January.