Sterling rose against the euro after the Bank of England raised interest rates a quarter point on Thursday, and reaffirmed expectations of gradual increases in British borrowing costs for the rest of the year.
The BoE's third hike since November took the benchmark interest rate to 4.25 percent. The Bank said it saw price pressures building despite the strength of the pound, which hit one-year highs against the single currency last month.
Economists had been nearly unanimous in predicting the rate hike, but dealers said some doubts crept into the market ahead of the decision. The hike sent short sterling interest rate futures lower, implying market expectations of higher rates to come.
"There were some speculating that the Bank of England could stay put today and some investors put in long positions that they closed when they actually hiked by 25 basis points," said Niels Christensen, currency strategist at Societe Generale.
"The short sterling contracts are down and the implicit rates are up quite a bit today so if anything the market is seeing the comments from the BoE as hawkish, maintaining the strong rate hike expectations."
By 1435 GMT, sterling traded steady on the day against the dollar at $1.7930, off the day's high of $1.7984 hit after the announcement.
Against the euro, the pound traded three-quarters of a percent higher on the day at 67.30 pence, recovering from a 1-1/2 month low of 67.94 hit earlier in the session.
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