Sterling and gilt yields jumped on Thursday after outgoing Bank of England policymaker Kristin Forbes unexpectedly voted for a rise in interest rates and others signalled it would not take much for them to follow suit. The bank cut interest rates to a record low last August to shield the economy from the aftermath of Britain's vote to leave the European Union but last year's 20 percent fall in sterling has seen inflation rise back towards the BoE's 2 percent target.
With evidence building that wages and consumer spending are finally slowing, however, money market pricing has pointed to there being little chance of the bank raising rates to cool an economy at a time when political risks to growth are rising.
Those views were given a jolt by Thursday's BoE minutes and forward interest rates for 12 months' time moved up by 4-5 basis points.
Sterling, which may be at the heart of the bank's concern over inflation and would benefit from any rise in interest rates, jumped by a full cent to $1.2361 and by more than half a percent to 86.83 pence per euro.
"We're still expecting sterling to underperform once Brexit negotiations are under way, but for now (we) are at levels where it would be unwise to fade here and sterling could start a short-term uptrend," Nomura analyst Jordan Rochester said.
"We can't see sterling going beyond an upper level of around $1.25 or the euro going meaningfully below 0.855."
Others were not convinced.
Analysts at the major currency trading banks have swung more aggressively against sterling in the past month, judging the political headlines of the Brexit process will weigh on the pound as talks get going in the next month.
JP Morgan strategist Paul Meggyesi said that the BoE message on Thursday looked slightly out of kilter with the signs from the economy since its last meeting.
"The UK economy appears to be in the first phase of a downturn and we think that will take the urgency out of any need to hike interest rates," he said.
"It may not be the ideal moment for the BOE to be thinking about whether they can sustain a shift in a hawkish direction. I think the bounce in sterling is a fade."