LONDON: Sterling trade-weighted index hovered near a six-year high on Thursday, boosted by gains against the dollar as the interest rate gap between US Treasuries and British gilts narrowed.
The yield spread between rate-sensitive two-year Treasuries and their British counterparts narrowed after minutes of January's Federal Reserve policy meeting showed officials were concerned about hiking interest rates too soon.
In contrast, data showed British wages growing strongly, outstripping inflation by the widest margin since before the financial crisis. Minutes from the Bank of England's latest policy meeting also showed two BoE policymakers voted to increase rates in the second half of the year.
"If the market shifts its pricing in the next few months - either re-pricing Fed rate expectations down, or bringing forward the expected timing of a UK rate hike - sterling can easily get back above $1.60," said Kit Juckes, currency strategist at Societe Generale.
Sterling was up 0.15 percent against the dollar at $1.5460, having hit a seven-week high of $1.5480 just after the Fed minutes were released. Those gains kept trade-weighted sterling index at 90.5, not far from its six-year high of 90.7 struck on Wednesday.
It lagged gains seen in the euro, though, and was last trading at 74 pence per euro, down around 0.2 percent.
The euro had sunk to a seven-year low of 73.48 pence on Wednesday and traders said the common currency's gains were likely to be temporary given risks from the Greek debt talks and the start of an asset-buying programme by the European Central Bank next month.
British interest rates have been at a record low of 0.5 percent for six years, and investors reckon they could stay there for at least a year due to low inflation.
But with wages picking up strongly and recent data showing that manufacturing, construction and services sectors all growing at a robust pace, some analysts reckon the BoE may have to tighten policy before the market anticipates.
Goldman Sachs said in a note that it expects the BoE to raise interest rates later this year on the back of solid growth and a gradual improvement in wages.
"While there are risks to our forecast, particularly as it relates to the timing of the first hike, if our relatively optimistic views on growth and wage inflation prove to be correct, we are comfortable with the view that the BoE will tighten by more than the market is currently discounting," Kevin Daly, economist at Goldman Sachs said.
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