By Jemima Kelly
LONDON (Reuters) - A broadly stronger sterling posted a fifth consecutive week of gains against the euro on Friday, its best run in nine months, as investors' fears over a "hard Brexit" that would see Britain lose access to the European Union's single market eased.
The pound jumped to a three-month high against the single currency <EURGBP=D4> and a two-month high against the dollar <GBP=D4> on Thursday, staying close to those levels on Friday, after Britain's Brexit minister said the government would consider paying into the EU budget in order to keep market access.
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And investor jitters were soothed further in the early hours of Friday, when a pro-EU Liberal Democrat candidate won a parliamentary seat previously held by the ruling Conservative Party on Friday, in a vote considered a protest against a 'hard Brexit'.
"That (by-election) has its own idiosyncrasies, so it's important not to overinterpret things," said UBS Wealth Management currency strategist Geoffrey Yu. "But that plus the comments we've had this week probably has helped to shift the narrative somewhat.
"What's now being priced in is greater resistance to a hard Brexit."
Sterling was up 0.7 percent at around $1.26 by 1640 GMT, having climbed over 1.5 percent over the course of the week.
Having already recorded its strongest month against the single currency in eight years in November, sterling climbed 0.6 percent to 84.185 pence per euro. It has risen almost 9 percent against the euro since mid-October, as the euro has been weighted down by a slew of upcoming political risks, such as Sunday's Italian referendum on constitutional reform.
"We expect sterling to weaken versus the U.S. dollar in 2017 but to strengthen versus the euro - this is because euro zone political uncertainty will weigh on the euro across the board," wrote ABN Amro strategists in a research note.
"As the focus in financial markets has shifted from Brexit to Trump and now to the euro zone political uncertainty, sterling is likely to be relatively resilient."
Data released on Friday showing growth in Britain's construction industry unexpectedly touched an eight-month high in November, while its costs rocketed at the fastest pace since 2011, had little impact on the currency.
A spokesman for EuroGroup President and Dutch Finance Minister Jeroen Dijsselbloem said on Thursday the situation for Britain after Brexit should not be better than for countries in the bloc, but that it was possible to "design new agreements to allow (Britain) to enter the internal market and to allow trade to continue."
"A further easing in fears over a 'hard' disruptive Brexit that should allow the recent out-performance for the pound to continue," said MUFG's European head of global markets research, Derek Halpenny.
(Editing by Toby Chopra)