Sterling hit a two-week high versus the dollar on Friday after UK retail sales rebounded far more than expected in January, adding fuel to talk of a Bank of England interest rate hike in the coming months. UK retail sales jumped 1.9 percent in January, more than three times the rise expected. This encouraged investors to continue buying the pound on the view that high inflation will soon force the central bank's hand.
However, the stellar headline figures were offset by a steep downward revision to the figures for December, when heavy snow caused the biggest December month-on-month fall in sales volumes on record. "The market wants to buy sterling at the moment, so anything that provides ammunition to the view that rates are going higher will support it," said Neil Mellor, currency strategist at Bank of New York Mellon.
Markets have almost fully priced in a 25 basis point rate hike in May. Sterling rose around one US cent from the day's lows to $1.6248, its highest since February 3, before easing to $1.6226, up 0.3 percent on the day. Traders said stops were hit earlier through $1.6230, though offers were reported at $1.6250. Nearby resistance was at $1.6279, the year's high hit in January.
Sterling pared gains against the euro, however, as the single currency gained broadly on talk that the European Central Bank could raise interest rates following reported comments by an ECB official. The euro fell to a session low of 83.58 pence, a shade above the recent one-month low of 83.56 pence, before later recovering to trade flat at 84.07.
Traders highlighted a large option expiry at 84.00 pence which they said may have influenced price action. Sterling was supported in early London trade by market talk another member of the BoE's Monetary Policy Committee had moved into the hawks' camp by voting for a rate rise in February.