LONDON, Feb 17 (Reuters) – Sterling strengthened against the euro and the dollar on Thursday as expectations of a rate hike by the Bank of England (BoE) continued to support the pound, while the market was still jittery about the threat of Russia invading Ukraine.

Against the single currency, sterling rose 0.35% to 83.43 pence at 1550 GMT, after touching its highest level since Feb 3.

Against the greenback, sterling managed to rise 0.25% to $1.3616 despite jitters in the market after Russian-backed separatists in eastern Ukraine accused Ukrainian government forces of opening fire on their territory, which Ukraine denied. read more

Analysts said the pound looked undervalued. It is around 10% lower versus the dollar since the Brexit referendum in 2016.

“On a longer term basis, the pound remains undervalued compared to historical averages despite the rate expectations and it reflects the potential headwinds to economic growth in the form of aging demographics, supply chain constraints post Brexit and other factors,” said Aaron Hurd, a senior portfolio manager at State Street Global Markets.

Simon Harvey, head of FX analysis at Monex Europe said sterling has predominantly been resistant to downturns in risk sentiment that has hampered neighbouring currencies, while it has been fairly sanguine in response to data developments.

“It is almost as if the sterling bulls and bears have locked into a bit of a stand-off themselves, with the March BoE meeting, or signals of policymakers intentions at that meeting, likely to prove the catalyst for the next leg in the pound,” he said.

On Wednesday, data showing that inflation in Britain rose to nearly 30-year high reinforced expectations that the BoE will further hike interest rates.

The BoE has already raised interest rates twice since December – lifting rates to 0.5% from 0.1% – and financial markets expect a further rate rise to 0.75% or 1% on March 17.

Reporting by Joice Alves; Editing by Rashmi Aich and Angus MacSwan

Our Standards: The Thomson Reuters Trust Principles.