Sterling held close to a 23-month high against the euro and edged up against the dollar after higher-than-expected British inflation data added to pressure on the Bank of England to raise interest rates next month.
Consumer price inflation rose more than expected to 5.4% in December, its highest in almost 30 years, official data showed.
The dollar was slightly lower, holding near a weekly high, after a surge in US yields resulted in sharp gains this week against the euro amid growing bets the Federal Reserve will raise rates.
Sterling was flat at 83.28 pence to the euro, within striking distance of its highest since February 2020 at 83.23 pence, hit on Jan. 11.
ING analysts said the inflation numbers, combined with better November activity data and better jobs data, suggested a 25bp hike by the Bank of England on Feb. 3.
Sterling heads back towards 2-1/2 month highs on rate appeal
"An awful lot is priced for the BoE cycle - yet we think it is too early to 'fade' the GBP rally on a fully-priced BoE cycle - just in the same way it is too early to fade the dollar rally," they said.
The pound rose 0.2% against the dollar at $1.3619, after hitting its highest since Nov. 1 last week at $1.3749.
However, some analysts consider that markets have already priced in multiple rate rises this year.
"GBP-USD further receding from recent peaks above 1.37 suggests that upside potential for this pair may be constrained above that threshold," Unicredit analysts said.
Bank of America (BofA) said it was bearish on the prospects for the British currency, adding that a positioning squeeze was the main driver of its rise at the beginning of 2022.
"Brexit matters, and the UK is faced with a unique set of challenges compared to other G10 nations," BofA analysts said.
"The passing of the pandemic may ease some of the UK's supply chain issues, but not all."
Political risks remained in the background, although the Telegraph said 11 lawmakers from Prime Minister Boris Johnson's Conservative Party had submitted letters of no confidence in him on Wednesday morning.
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