Sterling rises against euro, dollar as risk sentiment improves

By Stefano Rebaudo

June 9 (Reuters) - Sterling rose against the dollar and hit a two-week high versus the euro on Tuesday as risk appetite improved and the U.S. currency eased on hopes for a Middle East peace deal.

The pound is seen as a risk-sensitive currency, given Britain's reliance on global trade and capital flows.

The dollar edged down as investors weighed hopes for a peace deal and the U.S. rate outlook, while global stocks rallied as investors bought the latest dip in tech stocks. 

The pound fell sharply on Friday, largely due to dollar strength, as expectations for higher U.S. rates and safe-haven demand increased amid escalating Middle East violence. 

On Tuesday, sterling rose 0.36% to $1.3385, after hitting $1.33065 on Monday, its lowest since May 18.

Some market participants said focus is shifting away from political concerns, with sentiment towards the UK economy improving.

"Whilst investors have remained focused on the UK's fragile public finances, the second part of the ‘dual deficit’ narrative, the balance of payments, has been largely overlooked," Kamal Sharma, forex strategist at BofA, said.

"A higher capital-intensive mix of foreign direct investment inflows should be seen as a medium-term positive for the pound valuation trends," he added, citing AI-linked inflows alongside financial services and biotech investment.

The June 18 Makerfield by-election could revive concerns about fiscal policy if Greater Manchester Mayor Andy Burnham returns to Westminster, potentially paving the way for a leadership challenge to Prime Minister Keir Starmer later this year.     

Investors will closely watch GDP data on Friday for clues on the economic outlook.

"A notable upward revision in the PMI business indices last week suggests that the initial confidence drop was overstated and that the UK economy is more resilient to the Middle East events than first feared,” Enrique Díaz-Alvarez, chief economist at global financial services firm Ebury, said.

The S&P Global Purchasing Managers' Index for Britain's ‌services sector fell to 49.3, though the reading was stronger than the flash estimate of 47.9. 

Bank of England policymaker Megan Greene said last week she saw a growing case for raising interest rates as the Iran war drags on and increases the risk of broader price rises across the economy.     

The euro was down 0.13% to 86.33 pence, after hitting 86.27 pence, its lowest since May 26.

(reporting by Stefano Rebaudo. Editing by Mark Potter)