LONDON: Sterling hit a six-week high against the dollar on Monday after a Bank of England policymaker said interest rates would need to start rising sooner than investors expect.
Martin Weale, one of two BoE rate-setters who voted for a hike last year, told a Sunday newspaper the Bank expected inflation to rise above its target of 2 percent by mid-2017 and it would need to increase borrowing costs gradually in response.
Having posted a third consecutive week of gains for the first time since the summer, sterling hit $1.5441 on Monday , its highest since Jan. 2, before retreating to $1.5412, flat on the day.
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 another year due to low inflation, even as the economy heads for its strongest growth in nearly a decade.
The inflation rate fell to 0.5 percent in December, its lowest in more than 14 years, and is expected in a Reuters poll of economists to have fallen further to 0.3 percent in data due on Tuesday.
Those numbers will be followed on Wednesday by unemployment and wages data - both watched closely by BoE rate-setters.
"It's a busy week for sterling," said Kit Juckes, macro strategist at Societe Generale in London.
"(Sterling) is going to be more about market pricing of interest rates, and therefore reaction to heavy-hitting economic data, than about one- or two-point moves in opinion polls ahead of an election that still looks as if it's extremely close and likely to involve deal-making between parties."
Investors have started to hedge against swings in sterling's exchange rate in the months before the May 7 national ballot, with three-month implied volatility spiking to a 3-1/2-year high last week.
Against the euro, the pound edged down 0.2 percent to 74.08 pence, staying close to a seven-year high hit last week at 73.715 pence.
"With growth support re-emerging, we see sterling as a G10 outperformer along with the US dollar," wrote BNP Paribas strategists in a research note.
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