Sterling rose to one-year highs on a trade-weighted basis and gained ground on the stumbling dollar as robust data cemented the view the Bank of England will kick off this year's interest rate hikes with a move this week.
The Confederation of British Industry's monthly distributive survey showed British retail sales rose at their fastest annual pace in nearly two years in January.
The BoE starts its two-day meeting on interest rates on Wednesday and is widely expected to raise rates by a quarter point for the second time in three months.
Ed Balls, chief adviser to the Treasury, backed up this view, telling a conference there was a consensus that interest rates in Britain need to rise to keep the economy on track.
"The CBI survey continued to show robust retail sales and added to the argument of the BoE shifting rates this week," said Adrian Hughes, currency strategist at HSBC.
"We don't expect the ECB to move, which is further reason to invest in sterling. Rate differentials are set to widen."
By 1445 GMT sterling hit 103.60 on the trade-weighted basis, its highest since February 2003. It has a euro weighting of 64.82 percent, a dollar weighting of 16.49 percent and a yen one of 7.0 percent.
The pound rose more than one percent to $1.8424 from late New York levels on Monday before trimming gains to $1.8367. Against the euro it was flat at 68.28 pence.
The dollar came under broad pressure as speculation intensified that Group of Seven finance ministers, meeting later this week, would make no efforts to halt the greenback's slide.
"People are beginning to realise that there won't be much coming out of the G7 that will change the dollar's weak trend," said Marvin Barth, global currency economist at Citibank.
"We are encouraging people to go into sterling to sell dollars against (it)... We think (the BoE) will raise rates steadily over the course of the year."
BoE Governor Mervyn King has said sterling's rise in trade-weighted terms would have to be taken into account when the BoE prepared the February inflation report.
The rise in sterling should lower the Monetary Policy Committee's projected path for inflation, but analysts say the current level was unlikely to worry the BoE.
"Sterling's rise comes at the expense of the economy which is growing faster than others. It's also in part on broader dollar weakness. Currency strength won't be a big concern for the BoE because the balance of the UK economy is weighted towards the services sector over manufacturing," Hughes said.
Balls also said growth was picking up in all regions of Britain and was becoming more balanced, with manufacturing output picking up and consumption moderating.
Prime Minister Tony Blair said he believed Britain's growing public debt was manageable and now was not that time to cut spending or raise taxes.
Comments
Comments are closed.