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By Abhinav Ramnarayan
LONDON, Dec 13 (Reuters) - Sterling rose on Tuesday as investors awaited British inflation data for November, helped by finance minister Philip Hammond's comments supporting a staggered transition period for the country's exit from the European Union.
Hammond backed the idea on Monday of a transition period to smooth the Brexit process and said EU countries also stood to gain from a gradual British withdrawal.
That drove sterling as high as $1.27 overnight and it was trading 0.1 percent stronger on the day in early deals in London at $1.2695.
"Given this optimistic sentiment regarding a smooth divorce with the EU, we expect cable to continue trading higher for a while, at least ahead of the Bank of England policy meeting on Thursday," said IronFX analyst Charalambos Pissouros.
Hammond's remarks are the latest to strengthen investor hopes for a "soft Brexit" that prioritises maintaining strong economic ties with Europe over the need for strong immigration controls.
Pissouros and others said sterling could breach the $1.2700 level again although much would depend on how the dollar performs in the run-in to Wednesday's Federal Reserve policy statement, widely expected to raise interest rates for the first time in a year.
Before then, eyes will be on domestic inflation figures at 0930 GMT on Tuesday, expected to show a slight annual rise in consumer prices to 1.1 percent in November.
Many economists expect prices to come under more pressure next year as sterling's weakness feeds through to the cost of imports, but market pricing suggests UK interest rates will be on hold until the end of 2018 given the economic risks of the Brexit process.
"If inflation runs above target and consumption manages to hold up, then a delay of nearly two years before raising rates could seem excessive," said City Index head of research, Kathleen Brooks. "Thus, a higher than expected CPI reading today could lead to a readjustment in the UK rate markets." (Editing by Patrick Graham and Catherine Evans)