Sept 26 (Reuters) - Sterling rose on Thursday to within striking distance of its two-and-a-half-year peak against the dollar after China's stimulus plan boosted investors' risk appetite.

The pound usually appreciates when investors go for risky assets such as equities, which jumped on Thursday.

Monetary policy divergence between the Bank of England and other major central banks is also providing support to the British currency.

Stickier-than-expected UK inflation has fed expectations for a more gradual BoE easing cycle, while the Federal Reserve's focus has shifted to the need to support the labour market by easing monetary conditions.

"We think higher yield differentials will support the pound against the dollar over time," said Patrick Ernst, director of forex investment strategy at UBS.

"We expect the pair (sterling versus dollar) to gradually move higher but note that temporary setbacks are possible following the latest rally," he added.

Sterling rose 0.24% in morning trade to $1.3350 after hitting $1.34275 on Wednesday, its highest level since February 2022.

Analysts forecast similar economic and monetary policies in the UK and in the euro area.

"Higher yield differentials and a further pricing out of political risks will lend modest support to the pound over time (versus the euro)," UBS' Ernst said, adding that he expects the pound to remain range-bound at 83-85 pence per euro.

Against the common currency , the pound rose 0.15% to 83.45 pence after trading on Tuesday around its highest level since April 2022, at 83.15.

CAUTION ON RATES

The Bank of England , opens new tab should be cautious about cutting interest rates due to the risk of longer-term inflation pressures, Monetary Policy Committee member Megan Greene said in a speech on Wednesday.

Some analysts said the BoE's monetary easing cycle could be more intense than the market currently expects in 2025, weighing on the British currency.

"We think the pound is quite toppish at the moment as the decline in inflation lagged other countries," said Nick Andrews, forex strategist at HSBC.

"The impact will fade next year, and we expect the BoE to cut rates more quickly than markets currently forecast."

Investors will also focus on finance minister Rachel Reeves setting out her first budget on Oct. 30.

On Tuesday, British Prime Minister Keir Starmer said the cost of fixing shortfalls in the public finances would be shared fairly and that all his government's policies would still be properly funded.

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https://www.reuters.com/markets/currencies/sterling-rises-versus-dollar-euro-strong-risk-appetite-2024-09-26/