LONDON: Sterling was on track for its second straight week of gains against the euro on Friday, trading not far from 26-month highs, buoyed by expectations that monetary policy in Britain and the euro zone were headed in opposite directions.
Divergence, the yield gap between the two-year British government bonds and German bunds was near peaks last seen in September 2008, bolstering the pound's allure. Support for sterling got a boost on Thursday when Bank of England (BoE) Governor Mark Carney said that a rise in interest rates was "getting closer".
Sterling was steady against the euro and the dollar in early London trade. The euro was flat at 78.12 pence, not far from its low of 77.855 struck on Thursday, and heading for its second week of losses.
Against a buoyant dollar, sterling was steady at $1.6321, staying well below a high of $1.6525 struck after Scotland voted to stay in the United Kingdom late last week.
"Sterling is suffering against the dollar, but out-performing against the euro," ING head of currency strategy, Chris Turner said. "We look for the euro/sterling trend to continue, targeting a test of the 77.50 low seen in July 2012."
After the pound's rough ride leading up to last week's vote on Scottish independence, market attention is swinging back to economic fundamentals and monetary policy in Britain, the United States and continental Europe.
Until mid-July, the pound had been one of the best performers among leading currencies, surging 15 percent against the dollar in a year, on expectations the BoE would raise interest rates earlier than its peers.
Those expectations have been pushed back as data showed that the UK recovery was moderating and wage inflation was subdued.
Still, investors - including some of the world's largest money managers, such as Blackrock - are expecting the BoE to tighten monetary policy early next year.
Sterling overnight interbank average rates are pricing in the chance of a first rate increase by the BoE in the spring of 2015, having factored in a move in late 2015 until early August.
"While UK growth indicators have moderated, overall the picture for sterling against the crosses remains robust," Morgan Stanley said in a note.
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