Sterling hit a one-week high against a basket of currencies on Wednesday, a day before the Bank of England is widely expected to raise UK interest rates, taking them to the highest level among the G7 countries.
A 25 basis point hike to 5.5 percent is fully priced in by markets, and there has even been some speculation of a bigger than expected 50 basis point increase to help combat inflation.
Data released on Wednesday painted a reasonably robust picture of the UK economy, despite some signs of slowing retail sales growth, and did little to change rate expectations. "It seems that the expectation of as rate hike tomorrow may be supporting sterling. High yielders in general have been reasonably well supported," said Adrian Schmidt, currency strategist at RBS Financial Markets.
By 1358 GMT, sterling had risen half a percent to $1.9999, its highest in a week, but still more than a cent below 26-year highs scaled in April. In contrast to the BoE, the Federal Reserve is expected to hold rates at 5.25 percent on Wednesday, before cutting borrowing costs later this year. Sterling hit a one-week high on a trade-weighted basis at 103.9, and also rose to a two-week peak versus the euro, at 67.83 pence.
The British Retail Consortium/KPMG said on Wednesday UK retail sales growth slowed in April, but Nationwide's consumer confidence gauge rose to a six-month high.