* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv
By Jemima Kelly and Tommy Wilkes
LONDON, Jan 31 (Reuters) - Sterling rose against the dollar on Wednesday as the sell-off in the U.S. currency resumed, putting the pound on track for its best monthly performance since May 2009, thanks to dollar weakness and better prospects for a Brexit deal.
Broad dollar weakness also helped the pound shake off news that European Commission officials had rejected the City of London’s proposal to strike a post-Brexit free-trade deal on financial services.
Sterling has climbed more than 5 percent since the start of the year as the U.S. currency has weakened broadly and as investors have become optimistic about Britain’s economy and the prospect of a Brexit deal that is more favourable to the UK.
“It’s largely dollar-driven today,” said David Madden, an analyst at CMC Markets in London. “It’s more dollar selling than pound buying. Given that we saw any turnaround in the U.S. dollar earlier this week completely reversed, that’s the story of the week.”
The pound was up 0.4 percent at a daily high of $1.4233 at 1600 GMT, not far from the $1.4346 post-Brexit vote high it reached last week.
The dollar is stuck near three-year lows against a range of currencies, with sterling among the main beneficiaries in recent weeks.
Against the euro, the pound was flat on Wednesday after Reuters reported that EU officials had told British financiers they will not agree to a deal that would allow finance companies to operate in each others’ markets without barriers, because Britain has said it will leave the single market.
Sterling traded flat against the single currency at 87.585 pence per euro, after weakening in early London trading.
Leaked analysis showed on Tuesday that Britain’s economy would be worse off after Brexit whether it leaves the EU with a free trade deal, single market access, or with no deal at all. It was another blow to Prime Minister Theresa May.
Domestic economic developments are, however, supporting sterling.
The pound had strengthened on Tuesday after Bank of England Governor Mark Carney said the central bank was turning its focus back to the more conventional business of bringing down inflation. Britain’s economy has demonstrated it was getting over the damage wrought by the 2007-09 financial crisis.
Carney pointed out that wages were gradually rising, something the central bank wants to see as it considers when to follow up on November’s first rate hike in a decade.
“We sensed a more upbeat tone to his comments, which suggests that it might not take a lot for the BoE to alter its forward guidance,” said Derek Halpenny, MUFG’s European head of global markets research.
“The risks are piling up that the BoE will be much more active than implied by current market pricing.” (Editing by Larry King)