Sterling steadied on Wednesday within striking distance to its recent highs versus the dollar and the euro, as investors focused on possible rate increases from the Bank of England.

The pound has strengthened recently as investors ramped up expectations of further rate rises while Britain's focus on rolling out booster vaccinations rather than returning to coronavirus lockdown measures boosted risk sentiment.

Meanwhile, markets were unwilling to price in risks of domestic political instability, although Prime Minister Boris Johnson has faced intense scrutiny after a series of gatherings at his official residence during a lockdown.

Sterling steadies near 23-month high versus euro

The pound was flat against the dollar, after hitting its highest level since Nov. 4 at $1.3645 overnight.

The greenback slid to its weakest since mid-November against significant peers after Federal Reserve Chair Jerome Powell said it may take several months to make a decision on running down the central bank's $9 trillion balance sheet.

Sterling was unchanged versus the euro at 83.37 pence, after touching its highest level versus the single currency since February 2020 on Tuesday.

"The pound remains better positioned as long as markets continue to see prospects of a further aggressive tightening by the Bank of England this year," Unicredit analysts said.

Markets are pricing in an almost 80% chance of a 25 bps rate hike in February.

Bank of England Deputy Governor Jon Cunliffe will speak today at a conference starting at 1415 GMT.

"Markets seem very sceptical to price in any political instability in the UK, with the pound still scoring as the best performing currency of 2022," ING analysts said.

It emerged on Tuesday that Johnson's private secretary invited more than 100 people to a "bring your own booze" party at the prime minister's official residence during a coronavirus lockdown.

"We continue to favour EUR/GBP downside and a break below 0.8300 in the near term, and another good day for risk sentiment would likely help the higher-beta GBP gain some more ground," they added.