LONDON: Sterling topped $1.70 for the first time since August 2009 on Monday, adding to gains from last week after a surprise U-turn by the head of the Bank of England that pointed to the prospect of higher interest rates this year.
Governor Mark Carney's comments drove a surge for sterling on Friday, and his deputy, Charlie Bean, added some fuel on Sunday, when he said he was optimistic about the economy and would welcome the bank's beginning to "normalise" interest rates.
Analysts said the tone of the comments had firmed expectations that the minutes of the Bank's June meeting, due on Wednesday, would show at least one member of the monetary policy committee had backed an immediate rise in rates.
"All of these remarks do suggest the tide is turning at the Bank of England," said Jane Foley, a currency strategist with Rabobank in London.
"Whether that means that a hike by the end of this year is on the cards, we are not sure. But these minutes may go some way to showing us."
Before Carney's comments last Thursday, analysts had already been speculating that the minutes would show his colleague Martin Weale had voted in favour of a hike in rates now.
Sterling gained more than 10 percent in the past year on expectations a rapidly improving UK economy would prompt the bank to raise interest rates before its peers in Europe and the United States.
But the rally had stalled in the past month after Carney warned markets in mid-May not to expect swift action.
That added to the impact of his remarks last Thursday that pricing for a rate hike in the first half of next year might be too conservative.
Some analysts speculated he was moving to ensure he was not left behind by the consensus on the council.
Sterling gained as much as a third of a percent against the dollar to a five-year high of $1.7011 before retreating.
The euro was 0.2 percent lower at 79.65 pence, having fallen to 79.59 pence, its lowest since early October, 2012.
"Strength could continue heading into Wednesday's minutes," Citi analysts said in a morning note. "Indications a more hawkish contingent are growing closer to or in fact voted for hikes in June are likely to spur on the recent rally."
Like many in the market, Foley said the pound's strength would be more visible against the euro, undermined by the European Central Bank's moves to loosen policy just as the BoE headed in the opposite direction.
A US Federal Reserve meeting this week also may hint at when it will start to raise rates after the projected end to its monthly quantitative easing programme in September or October.
"As long as the ECB maintains this dovish line sterling will remain strong against the euro and we could see it gain to as much as 78 pence," Foley said. "Against the dollar it may be more complicated."
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