Sterling rose a third of a percent against the euro and held steady against the broadly stronger dollar on Friday, helped by hawkish comments from Bank of England Monetary Policy Committee member Paul Tucker.
Interest rates will probably have to continue rising gradually, Tucker said in a speech to fund managers in Edinburgh.
Sterling has risen nearly two percent against the dollar and the euro this week, with minutes of the Bank of England's March policy meeting released on Wednesday suggesting a rate rise was not far off.
"This week we have seen an increase in UK rate rise expectations," said Steven Saywell, senior currency strategist at Citibank. "We see UK rates at five percent by the end of the year and expect more hawkish comments from the BoE."
Sterling rose to 67.23 pence per euro and traded at $1.8351 at 1500 GMT. The pound hit one-week highs of 67.07 pence per euro and $1.8401 on Thursday on upbeat retail sales data.
UK rates of 4.0 percent and possibly rising compare well for investors with US rates of 1.0 percent and a eurozone rate of 2.0 percent.
News that Britain's Network Rail is to issue 3.0 billion euros of debt also weighed on euro/sterling, due to speculation the company will swap the proceeds back into sterling.
Next week Chancellor of the Exchequer Gordon Brown appears before the Treasury Select Committee on the budget on Wednesday, and MPC members appear before a Treasury Select Committee on Thursday.
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