LONDON: Sterling rose against both the euro and the dollar after the Bank of England said inflation levels in Britain were concerning and urged Britons, in interviews published over the weekend, to get ready for earlier interest rate increases.
BoE Governor Andrew Bailey stressed the need to prevent inflation - running above the 2% target - from becoming permanently embedded. Fellow policymaker Michael Saunders said households must brace for "significantly earlier" interest rate rises.
Interest rate futures traded on the CME showed November contracts were pricing in as much as a 20% probability of a rate hike next month compared with 12% last week, while December futures were pricing in a 45% probability of a rate increase by then.
A separate estimate from Refinitiv based on interest rate futures suggested a 15 bps rate hike by December is now fully priced in.
The two-year gilt yield touched 0.618%, its highest since January 2020.
In early London trading, sterling rose to a two-week high versus the dollar of $1.3674, but it lost some steam edging 0.1% higher at $1.3634 by 1440 GMT.
Versus the euro, it was 0.1% higher at 84.93, after briefly touching a two-month high when the market opened.
Sterling traders spent the morning pricing in the commentary from BoE officials and the prospects of rate hikes, but the focus later moved to the state of the British economy, said Simon Harvey, senior FX Market analysts at Monex Europe.
"We see the pound's gains from here as limited due to concerns over the underlying level of economic activity," said Harvey.
Traders were also watching post-Brexit negotiations between the UK and the European Union. The EU Commission is due to unveil proposals this week to ease controls on trade coming from the UK province of Northern Ireland to EU member state Ireland.
Britain will also present a new negotiating document on the protocol to the EU this week, Prime Minister Boris Johnson's spokesman said.
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