Sterling hit a four-week high against the euro on Wednesday, as investors continued to bet on higher UK interest rates despite minutes from the latest Bank of England meeting that pointed to steady borrowing costs.
Sterling briefly fell against the euro after the minutes of the July meeting showed all seven current Monetary Policy Committee members voted to keep rates unchanged and no arguments were raised either for a hike or a cut in rates.
But the pound quickly rebounded as the minutes did not take into account Tuesday's strong inflation data that has prompted some banks to forecast a rise in rates before the end of the year.
"The minutes themselves were pretty dovish, but the market says they didn't take into account the most recent rise in the CPI and the more recent evidence of a pick-up in house prices," said Daragh Maher, a senior currency strategist at Calyon.
Consumer prices rose 2.5 percent on the year in June, higher than the forecast 2.3 percent, data released on Tuesday showed. Recent data on the UK property market has also been upbeat. By 1335 GMT, sterling was trading at 68.32 pence per euro after hitting a four-week high of 68.28 pence.
Sterling was trading at $1.8258, steady on the day. It fell around half a cent from a session high of $1.8293 after the minutes were released. Bear Stearns International has revised its UK interest rate forecast to a rise in 2006 from a hike in the first quarter of 2007.
Investors will be looking at the release of UK retail sales data for June on Thursday to see how sales fared during the World Cup period.