LONDON: Sterling rose on Monday, underpinned by favourable interest rate differentials with investors betting that interest rates may rise sooner than previously thought on the back of a sustained British economic recovery.
The pound, which has lost some ground since the start of the year, was up 0.2 percent to $1.6450, building on Friday's gains of 0.4 percent after bumper retail sales data saw it rally and pull away from a one-month low.
The euro was slightly lower at 82.40 pence, hovering close of a one-year low of 82.305 with hedge funds cited as main sellers of the common currency, traders said.
Overnight, data showed asking prices for homes in Britain saw their biggest ever rise for the December-January period, property website Rightmove said on Monday, all of which pointed to sustained demand from consumers and boded well for growth.
"Further evidence of improving momentum in the UK housing market, which is supportive for growth, was again evident in the latest Rightmove survey," said Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi.
"The pound has regained upward momentum in the near-term," he added, pointing to the recent uptick in data.
The pound was underpinned by higher short-term market rates. Friday's much stronger than forecast retail sales number led markets to price in the possibility of a rise in interest rates in a year's time.
All eyes are now on how the Bank of England will react to the data and whether it will lower the 7 percent unemployment threshold at which it will start to consider raising rates.
UK jobs data will be released on Wednesday and it is forecast that the jobless rate for November will fall to 7.3 percent from 7.4 percent.
Minutes from the BoE's latest policy meeting will also be released on Wednesday. That may offer the bank a first chance to tweak its message to the markets on interest rates since December's policy meeting.
Many economists expect it to set the stage for it to lower the unemployment threshold to 6.5 percent from 7 percent - a move that will reinforce its message that it will keep rates lower for longer.
"Any hints about the option of lowering the unemployment threshold, or reducing market expectations about higher rates, could be real a problem for the British pound," said Nawaz Ali, currency analyst at Western Union.
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