Sterling rose against the euro and the dollar on Thursday, boosted by the Bank of England's decision to leave interest rates on hold at 5.75 percent rather than cutting them. Although economists polled by Reuters had unanimously expected no change, there had been some speculation in the market over the possibility of a surprise rate cut.
"There was about 20 percent chance priced into the market that they might surprise and cut rates, and also (there was speculation) that they might issue some kind of statement supporting the idea that they would cut rates in the future," said Paul Robson, currency strategist at RBS Global Banking.
"We didn't get either of those - they didn't cut rates and they didn't issue a statement - and that's given sterling a little bit of a boost." By 1348 GMT, sterling was up 0.2 percent at $2.0352.
The euro shed 0.25 percent to 69.15 pence, trading more than one penny below last month's 2-1/2 year highs. The European Central Bank also left rates on hold on Thursday, but the euro got a knock after President Jean-Claude Trichet adopted a slightly more dovish tone in his news conference, highlighting downside risks to growth.
Analysts though said that sterling's strength would probably be short-lived, especially as the ECB is seen staying on hold next year or even considering rate hikes, while the BoE is still likely to loosen monetary policy in coming months. "We think that rates will be cut next month because we think that the data are going to deteriorate," said Robson at RBS.
"That suggests that one of the supports of sterling - high interest rates - will continue to be eroded and sterling will under-perform." Data on Thursday gave further evidence of a slowdown in the British housing market, with the September Halifax house price index falling 0.6 percent on the month.