LONDON: Sterling rose above $1.6200 for the first time in a week on Thursday, extending overnight gains in early European trade after the U.S. Federal Reserve fired a warning shot about the dollar's three-month march higher.
Sterling gained another 0.2 percent compared to Wednesday's U.S. close at $1.6208 and was up almost 2 full cents compared to prices late in the previous session in Europe.
The pound was suffering against the euro, however, the single currency trading just off three-week highs around 79.00 pence.
"The fallout from the post-Fed move is dominating and that will probably continue for at least another day or so," said Graham Davidson, a currency trader with National Australia Bank in London.
"A lot of the move last night has been driven by stop loss orders rather than people putting on new dollar shorts, but it does feel like there might be more of that (positioning) for the system to cough up yet."
A number of major banks have predicted that the dollar's 10-percent gain since May is the start of a seismic shift in foreign exchange markets that could see it gain another 20 percent against the euro over the next couple of years.
The fallout for sterling, whose own rise in trade-weighted terms over the past 18 months now seems to have stalled, is less clear.
Expectations for a rise in UK interest rates, the main driver behind the pound's gains over that period, have been pushed back into next year, with only a few analysts still predicting the Bank of England could move in November.
Nothing is expected from the BoE's meeting on Thursday but there were the latest signs overnight that a previously booming London housing market was cooling off a touch - potentially easing pressure on the bank to act.
"This is further support for the notion that the UK housing market is peaking and with it, in all probability, the UK economic cycle," said Societe Generale strategist Kit Juckes.
"We still expect the UK MPC to raise rates in Q1 2015, before the Fed, but as U.S. growth is picking up and UK growth is slowing, we also look for an earlier, lower peak in UK rates."
Scotland's independence referendum last month also damaged faith in the pound and turned eyes to political risks on the horizon starting with a debate over constitutional change and fiscal policy ahead of next May's national elections.
The polls have swung in favour of Prime Minister David Cameron's Conservatives, who are more trusted on fiscal policy by markets than opposition Labour but also set to deliver a referendum on a potential departure from the European Union.
The filling of two empty Westminster seats in by-elections on Thursday may further buoy the anti-EU UK Independence Party, whose support in the south of England is dragging Cameron to the right.
"I think a lot of people have come round to the view that the political uncertainty over the next eight months is going to weigh on sterling," said NAB's Davidson.
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