LONDON: Sterling moved closer to a two-and-a-half-year high against the dollar on Thursday, building on gains after the Bank of England's more upbeat economic forecast brought forward expectations of an interest rate hike.
And while the pound gave back some of Wednesday's huge gains against the euro, on a trade-weighted basis it rose to its highest in three weeks.
The pound, which has no major UK economic data to provide direction until Tuesday, rose as high as $1.6654, not far from the $1.6667 it hit last month, which was its highest since May 2011.
The euro, which tumbled 1.2 percent on Wednesday after the BoE's statement and on talk of negative deposit rates at the European Central Bank, rebounded 0.2 percent to 82.11 pence
as investors sought safe havens from a fall in global stocks.
The BoE raised its forecast for economic growth this year to 3.4 percent from 2.8 percent and said market pricing calling for the first tightening of policy in five years in the second quarter of next year were consistent with keeping inflation on target.
"The stronger growth forecast is providing strength for sterling in the near term," said Morgan Stanley strategist Ian Stannard.
He said the downtrend in euro-sterling had further to run, despite Thursday's bounce, while the pound could advance further against the dollar in the next day or so.
But he added that sterling could lose ground in the medium term as investors begin to reassess comments by the Bank, which had previously set a 7 percent unemployment threshold after which it would consider rate hikes but which will now look at 18 separate measures of the spare capacity in Britain's economy.
"The market is likely to take the view that the more flexible framework does provide the ability to maintain a more dovish stance," Stannard said.
"If (that's the case) then support for sterling will start to fade."
Sterling overnight interbank money market rates are pricing in the chance of a hike in interest rates in a year's time, compared with 15 months' time before Wednesday's inflation report.
Marshall Gittler, head of global FX strategy at IronFX Global, said sterling could see profit-taking after Wednesday's big rises.
But he added: "Longer term, this new system basically means a return to watching all the data every month, not just unemployment, and therefore makes it likely that sterling will become more volatile - and stronger, in my view."
