Sterling rose to a one-week high against the dollar on Monday and also bounced higher on the euro after data showed UK factory gate inflation hitting an eight-year high in September due to soaring oil prices.
Producer output prices rose 0.3 percent in September after an upwardly-revised 0.4 percent gain in the month before, taking the annual rate to 3.1 percent - its highest since April 1996.
Producer input prices rose 1.3 percent for an annual rise of 7.4 percent, its biggest gain since November 2000.
The figures contrasted with recent soft data which raised expectations British interest rates, currently at 4.75 percent, might be close to their peak, and weighed on sterling.
"The PPI data was better than expected and so the market is thinking that another 25 basis point rate hike may be possible in November, which should be positive for sterling," said Marios Maratheftis, currency strategist at Standard Chartered in London.
By 1420 GMT sterling had risen to a one-week high of $1.7969 compared with pre-data levels around $1.7943. Against the euro it gained a quarter of a percent to 68.95 pence, edging away from last week's eight-month low of 69.25 pence.
"(Sterling's) rebound may prove to be short-lived. Because output prices are rising only marginally and this suggests that corporate profits are being squeezed. The trade balance also continues to deteriorate quite sharply despite expectations for a moderate improvement," said Ian Stannard, currency strategist at BNP Paribas.
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