LONDON: Sterling was steady near a seven-month high against a basket of currencies on Tuesday, supported by a recent improvement in economic data that has suggested interest rates may rise sooner than the Bank of England has indicated.
Trade-weighted sterling was at 81.7, only a bit lower than Monday's peak of 81.8, which was its highest level since January 22, according to BoE data.
The pound was up 0.1 percent at $1.5671, close to the June 19 high of $1.5678. A reported options barrier at $1.5700 would act as near-term resistance. Beyond that resistance was cited at the 200-week moving average of $1.5753.
Earlier this month, BoE governor Mark Carney pledged to keep interest rates low until unemployment falls to 7 percent in his forward guidance but also added some "knockout clauses" that would allow the bank to tighten policy if inflation rose faster than expected or if financial stability were threatened.
Carney forecast it would take three years for the jobless rate to hit 7 percent, but financial markets expect it will be sooner given improving UK economic data.
The Confederation of British Industry said on Monday it had upgraded its UK growth forecasts for 2013 and 2014 and that the jobless rate would edge lower in coming months.
"Those knockout clauses have scrambled Carney's 'lower rates for longer' message and it has turned out to be bullish sterling. To support that, UK data is looking robust and there is definitely more upside for sterling," said Nawaz Ali, UK market analyst at Western Union.
At the short end of the curve, sterling overnight interbank average rates (SONIA) inched towards pricing in a first rate rise in 18 months. The two-year SONIA rate was at 0.5525 percent while the 18-month rate was at 0.48500 percent, pointing to increased bets of a BoE rate hike in 2015.
Ali, however, added that sterling could see minor setbacks as some investors might choose to take profit at these levels, given that sterling has risen around 6 percent from the $1.48 levels seen in early July.
Analysts also cautioned that the pound could see some consolidation against the dollar and risks edging lower ahead of the US Federal Reserve minutes on Wednesday, where further hints on trimming stimulus could broadly lift the dollar.
Strategists at Morgan Stanley do not expect the pound to rise further and maintain their short position at $1.5640.
"Concerns regarding the sustainability of the UK recovery are continuing to build, suggesting that sterling gains are likely to be limited. We now look for the recovery to run out of steam."
Against sterling, the euro was flat at 85.24 pence, not far from a 1-1/2 month low of 85.05 pence. Chartists said the pair could slip to the 200-day moving average of 84.58 pence in the coming weeks.
The European Central Bank is expected to keep policy accommodative for longer than the BoE, to support the euro zone's fragile recovery after it came out of a long drawn out recession in the second quarter.
Reflecting this, the gap between British and German 10-year bond yields was at a more than three-year high.
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