Sterling climbed further above the $2 mark on Tuesday, boosted by expectations of a Bank of England rate hike as soon as next week. Investors were awaiting comments from a BoE deputy governor John Gieve at the University of Surrey later in the session.
He was one of the four policymakers who voted against this month's on hold decision and in favour of a rate hike. News of a 5-4 split in the Monetary Policy Committee this month surprised investors, shifting opinion sharply towards the next rate rise being in July rather than August.
Markets started pricing in a greater chance of further hikes to 6 percent and beyond in the future, helping sterling to its biggest weekly rally versus the dollar in five months last week.
"Sterling in the last 18 months has all been about short-dated yields and we've got one-year deposit rates in sterling at 6.25 percent or so. It's looking very attractive," said Chris Turner, head of FX strategy research at ING. The pound rose as high as $2.0016, popping above the $2 mark for the second day in a row and setting fresh two-month highs. The euro steadied at 67.35 pence.
On a trade-weighted basis sterling traded as high as 105, matching the previous day's four-month peak. The pound eased versus a broadly firmer yen, retreating from last week's 15-year peaks of 247.91 yen.
Later this week, investors will look to CBI distributive trade data on Wednesday and final first quarter GDP figures on Friday for signs of how the British economy is performing and whether four interest rate hikes since August are starting to bite.
"Things may get a bit more interesting as we move beyond the end of the summer if the rate hikes start to weigh on activity. We are bearish sterling for the second half, but these may be the last vestiges of sterling strength," said ING's Turner.