Sterling strengthened against the dollar and yen on Friday as the market took heart from strong British data and a return to risk appetite led investors back into the carry trade. Sterling strengthened broadly after Britain's GDP deflator - a measure of inflation in the economy - hit its highest level since 1996 in the second quarter.
"GDP numbers were pretty strong, the consumer number was firmer and this has led markets to think that the Bank of England is not done in raising interest rates," said James Knightley, economist at ING.
At 1429 GMT the pound was up 0.2 percent versus the dollar at $2.0097, after hitting its highest level in 10 days at $2.0116. It was steady at 233.26 yen, paring losses posted earlier in the day.
A broadly stronger euro was up 0.3 percent against the pound at 67.83 pence. The pound got a further boost when US housing data came in stronger than expected.
This led investors to be slightly more comfortable in relatively risky carry trades where they borrow low-yielding currencies like the yen to invest in higher-yielding assets. Sterling, with the highest interest rates in the Group of Seven industrialised nations, has been a key beneficiary of this trade. Monday is a public holiday in Britain.
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