LONDON: Sterling steadied against the euro on Wednesday after peaking at a 4-1/2-month high, as strong UK factory data bolstered expectations of an imminent Bank of England interest rate rise.
With a rate rise decision on Thursday largely priced in, investors will be focused on the degree of unity among BoE rate-setters as they gauge the likelihood of further increases.
BoE Governor Mark Carney is expected to reveal the first hike in UK borrowing costs in more than a decade at 1230 GMT on Thursday following the Bank's quarterly inflation update.
Investors will also be watching for the results of a monthly survey of the British construction sector, expected at 0930 GMT on Thursday, for further clues about the health of the economy and the likelihood of a longer-term tightening cycle.
Wednesday's survey of British factories showed stronger-than-expected growth in the sector last month.
"We're assuming the Bank will follow through this time and raise rates," MUFG currency economist Lee Hardman said.
"If that's the case, then the market will focus on what kind of signal the BoE sends on the outlook for further rate hikes," he said, adding that he expects the bank to keep the door open for further tightening next year.
Against the euro, sterling hit highs not seen since mid-June, reaching 87.33 pence after the factory data release. By 1631 GMT it had steadied at 87.64 pence.
The pound also climbed against the dollar, hitting a two-week high of $1.3321, up from $1.3283 before the data. It had slipped down by 1631 GMT, trading 0.2 lower on the day.
"This morning's manufacturing (data) is largely behind the latest rally in the pound, with the survey having highlighted robust domestic demand as well as rising inflation pressures," Craig Erlam, market analyst at OANDA, said in a note to clients.
Signs of progress in Brexit talks have also given a boost to sterling this week, including comments by the European Union's chief Brexit negotiator Michel Barnier, who said on Tuesday he was ready to move onto the next stage of talks.
"Behind the scenes in London things are still simmering though as the government still does not seem to agree about its future course. As a result I would treat the current sterling rally with great caution," Antje Praefcke, an analyst at Commerzbank, wrote in a note to clients.
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