Sterling held close to a 23-month high against the euro and rose versus a weakening dollar on Thursday, still supported by expectations of UK interest rate rises.
Money markets currently price in more than 100 basis points (bps) in interest rate rises in 2022 and an 87% chance of a 25 bps increase in February, after data showed on Wednesday that UK inflation rose faster than expected to its highest in nearly 30 years in December.
Domestic politics is not damaging sentiment, after Prime Minister Boris Johnson dismissed calls to resign on Wednesday, fighting to save his premiership amid a deepening revolt inside his party over a series of lockdown parties in Downing Street.
Sterling was flat at 83.33 pence per euro, within striking distance of a 23-month high at 83.13 hit on Wednesday.
Sterling heads back towards 2-1/2 month highs on rate appeal
"If anything, there is a risk of the BoE (Bank of England) disappointing the market by acting less decisively" at its February meeting, Commerzbank analysts said, adding "a lot has already been priced in" in terms of future rate rises.
"The market's rate speculations might be able to provide a little more support.
However, the risk of profit-taking is likely to rise," they added.
On the broader market, commodity prices boosted riskier currencies while the dollar index edged lower.
The pound was up 0.15% against the greenback at $1.3633.
"Unsurprisingly, political risk has not damaged GBP, where the focus remains squarely on whether the BoE hikes 25bp on February 3," ING analysts said, adding they "continue to favour EUR/GBP drifting to the 0.8270/80 area."
Berenberg economists see a change in prime minister as positive for UK markets as the Conservative party would likely choose his replacement based on who would have the best chance of beating Labour leader Keir Starmer in an election.
They mentioned finance minister Rishi Sunak, foreign minister Liz Truss, and chair of the Health and Social Care Committee, Jeremy Hunt.
They argued a new prime minister would pursue "similar policies to Johnson in a much calmer and more deliberate fashion."
Johnson is not going to leave, Health Secretary Sajid Javid said on Thursday when asked if he would like to run to be prime minister.
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