Sterling hit an eight-week high against the weak euro and ticked up against the dollar on Thursday, shrugging off a widely-expected decision by the Bank of England to leave interest rates unchanged.
The Bank of England kept rates at 4.5 percent for the third month running, and investors are debating the possibility of a further rate cut, after a quarter-point cut in August.
But the BoE decision played second fiddle to dollar moves on Thursday.
"We are looking at (the possibility) they will cut rates at some stage in 2006. For cable (sterling/dollar) we are in the middle of the range at $1.7450 and euro/sterling moved lower as the euro came off against the dollar," said Adrian Hughes, currency strategist at HSBC.
By 1545 GMT, the pound rose to 67.16 pence per euro, its highest level since mid-September. The dollar and sterling rose against the euro during the European afternoon as markets ignored data showing a record US trade deficit and focused instead on the US growth and interest rate outlook.
Against the dollar, the pound was slightly higher at $1.7449, off a three-month low of $1.7321 hit earlier in this week.
Analysts say the interest rate outlook for Britain and the euro zone, where the European Central Bank is expected to tighten policy as early as December, meant sterling would come under pressure.
"We do expect (the BoE) to cut... at some point over the next six months to a year and that's likely to weigh on sterling," said Marvin Barth, currency economist at Citigroup. Investors are focused on the BoE's quarterly inflation report due next week for further clues on the interest rate outlook.