LONDON: Sterling inched up on Friday after data showed British house prices unexpectedly surging in August, keeping alive expectations that the Bank of England will hike interest rates in the coming months.
Earlier on Friday, a survey showed British consumer morale strengthening more than expected in August, suggesting Britons feel more confident about their economy and that consumer spending will remain a big driver of the country's recovery.
Data showed inflation in the euro zone falling to 0.3 percent in August, well into the European Central Bank's "danger zone" of below 1 percent, feeding suggestions that the ECB may soon have to resort to quantitative easing (QE).
In contrast, many investors expect the Bank of England to be the first major central bank to tighten policy since the financial crisis.
The common currency weakened against the pound to hit a two-week low of 79.305 pence per euro.
In later trading, it was down 0.1 percent at 79.40 pence.
The euro has struggled for most of this week on QE speculation following dovish comments from ECB chief Mario Draghi at the weekend, who said the central bank would use "all the available instruments" to ward off the threat of deflation.
That had helped widen interest rate differentials in favour of sterling fixed-income assets, which in turn has pushed up the pound.
The ECB will meet next Thursday, but some think that despite inflation near zero and a faltering economy, the market has got ahead of itself in expecting imminent policy action.
"There could be a bit of disappointment with the ECB next week that they're not following through, so that could favour some bounce-back for euro/sterling," said Simon Smith, head of research at online foreign exchange broker FxPro.
Against the dollar, the pound edged up 0.1 percent to trade at $1.6601.
It was set for its first week of gains against the greenback in eight weeks.
Some said the pound was likely to rise further in the coming weeks.
Bank of England Governor Mark Carney surprised markets in mid-June by saying interest rates could rise sooner than expected, but has since adopted a more dovish tone, pushing down the pound from a near-six year high in the middle of July.
"With UK money markets now attaching only a 5 percent probability to a rate hike by year-end, down from over 80 percent in the wake of Carney's Mansion House speech three months ago, the risks favour sterling higher on the crosses in the near-term," said Adam Cole, head of currency strategy at RBC Capital Markets.
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