Sterling jumped more than half a US cent and also rose against the euro on Thursday as stronger than expected UK retail sales raised expectations that there might be more room for British interest rates to rise.
Retail sales rose 0.6 percent last month versus expectations of a 0.3 percent fall, and reversing July's revised 0.6 percent drop. This brought the year-on-year rate up to 6.5 percent.
This followed a string of soft UK data and comments from a Bank of England policymaker on Wednesday had fanned expectations that British interest rates may be close to their peak following five rises since November.
"(There was a) big surprise on the numbers. (They were) much stronger than people expected. People have gone overboard on the slowdown. Everyone got so pessimistic about the housing market, retail sales, this Armageddon August that everyone was talking about," said Lee Ferridge, head of global foreign exchange strategy at Rabobank.
Sterling rose as high as $1.7865 by 1015 GMT, up half a percent on the day. Against the euro it also hit the day's high of 68.03 pence, having hit a seven-month low of 68.57 pence on Wednesday.
Sterling's trade-weighted index, which has a euro weighting of 64.82 percent, a dollar weighting of 16.49 percent and a yen one of 7.0 percent, rebounded from Wednesday's 7-1/2 month low.
The monthly gains in retail sales were led by sharp rises for clothing and footwear and department stores.
"It's a clear indication that UK consumers aren't about to shove money in the bank and stop spending. It suggests the Bank of England will continue to raise rates in their gradual approach," said Gavin Redknap, UK economist at Standard Chartered.
The BoE has raised interest rates from a low of 3.5 percent in November to 4.75 percent.
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