The trade-weighted sterling index stood near a six-year high on Friday, lifted by its gains against the euro, which slumped to its lowest in seven years on worries about Greek debt. UK retail sales for December fell short of expectations, weighing slightly on the pound against the dollar. Other data showed that public finances improved in January but also fell slightly short of expectations.
The data came in a week when investors grew more confident that Britain's robust growth outlook will prompt the central bank to raise rates sooner than expected. British wages are rising, and minutes from the Bank of England's latest policy meeting showed two policymakers could consider increasing rates in the second half of the year.
Sterling rose to a seven-year high of 73.40 pence per euro and was on track for a third straight week of gains. Those gains saw the trade-weighted sterling index at 90.7, a six-year high. By afternoon trade, it was at 90.5. Traders said the euro was likely to stay under pressure from the Greek debt talks and the start of an asset-buying programme by the European Central Bank next month. Any bounce in the euro due to a successful conclusion of a euro zone finance ministers' meeting that could help Greece avoid bankruptcy would prove temporary.
"We continue to be constructive on sterling against the euro, as yield seekers favour UK debt," said Peter Rosenstreich, head of market strategy at Swissquote Bank. Against the dollar, sterling was lower at $1.5392, down from a seven-week high of $1.5480 on Wednesday. It reached those highs after Federal Reserve minutes showed that the US central bank was likely to be patient before hiking rates.
British interest rates have also been at a record low of 0.5 percent for six years, and with inflation low, investors reckon they could stay there for at least another year. But with wages picking up and recent data showing that manufacturing, construction and services are all growing at a robust pace, some analysts say the BoE may have to tighten policy before the market anticipates. "The (retail sales) data can be particularly erratic around December/January, but the underlying trend remains solid," RBC Capital said in a note.