GBP/EUR rallies on domestic dataAlso aided by ECB whispersAnalysts expect support for GBP to lingerGlobal sentiment key over latter part of Jan.

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The Pound to Euro exchange rate (GBP/EUR) has risen to four-week highs following a run of better-than-expected domestic data and analysts say the currency should remain supported near-term.

Pound Sterling has appreciated by 1.25% against the Euro this week following wage data that revealed record pay settlements and signs the economy is still strong enough to churn out hot core inflation prints.

Core inflation rose 6.3% year-on-year in December and average earnings with bonuses included advanced 6.4% in November, which is up on October's 6.2%.

These are the two key data points for the Bank of England to consider when it meets in February and analysts say there is little prospect it can slow down its interest rate hiking cycle.

Expectations for a 50 basis point hike in February rose to above 80% in the wake of the data and UK bond yields rose in response, in turn encouraging a bid for Pound Sterling.

GBP/EUR rose to a peak at 1.1448 in response to the developments, taking typical bank account payment rates to approximately 1.1205, competitive cash and holiday rates to around 1.1331 and competitive money transfer rates to approximately 1.1400.

Above: GBP/EUR at four hour intervals. Consider setting a free FX rate alert here to better time your payment requirements.

Shahab Jalinoos, who leads FX strategy and research at Credit Suisse, says GBP/EUR can still advance to 1.15 from here, while GBP/USD can rally to a near-term target at 1.2450.

The analyst says the recent falls in wholesale gas prices will also assist the UK's terms of trade while lowering the odds of a deep recession.

The Pound started 2023 on a soft footing but found a bid last week after data showed the UK economy likely avoided a recession in the final quarter of 2022, confounding a consensus amongst economists for the economy to have fallen into a deep slump.

Christmas trading results from major UK retailers meanwhile revealed consumers continue to spend, further underscoring a view the market might have started 2023 with too pessimistic a view on the Pound.

"Sterling strengthened significantly against both the dollar, from GBP/USD 1.21 to 1.23, and the euro from EUR/GBP 0.88 to 0.87," says Asmara Jamaleh, an Economist at Intesa Sanpaolo.

"Overall, data on the UK economy validate the need to proceed with BoE rate hikes, totalling a further 75-100 bps by the spring, that would help the pound climb further against the dollar, albeit generally not as much as the euro, given the larger expected rate hikes expected from the ECB in the next few months," says Jamaleh.

The Euro advanced 2.50% against the Pound in December after the European Central Bank (ECB) indicated it would need to raise interest rates by an outsized 50 basis points on at least two occasions in early 2023, more than was expected from peer central banks.

But the Pound surged by 0.80% against the Euro on Tuesday after reports suggested the ECB might already be reconsidering this position and opting for less hikes.

This prompted Eurozone bond yields to retreat, which acted as a drag on the Euro and cemented a recent base in GBP/EUR.

The reports have subsequently been challenged, but it would appear that 'peak' hawkishness at the ECB has been reached in light of emerging signs of caution, denying the Euro the prospect of significant central bank-inspired upside going forward.

The final major UK data release of the month falls on Friday when retail sales for December are released but the Pound will likely begin to start taking direction from global events over the remainder of the month as the data calendar dries up.

Of particular importance will be global investor sentiment which plays a particularly important role for the performance in the Pound.

If global markets can continue to rally then the Pound would likely benefit, but any setback to sentiment would likely be reflected in a weaker Sterling.

Of particular interest to investors will be the state of the U.S. economy which appears to be slowing sharply. Any fears of a 'hard landing' could trigger equity market downside, in turn undermining Sterling.