Sterling extended gains above $1.70 to hit a 5-1/2 year high against the dollar on Thursday, bolstered by the diverging monetary policy outlooks between the Bank of England and the US Federal Reserve. Britain's pound was also helped by robust data. A measure from the Confederation of British Industry showed factory orders grew at their fastest pace in six months in June, far outstripping expectations.
The yield gap between two-year British gilts and US Treasuries widened, prompting more investors to buy sterling. While the Federal Reserve signalled on Wednesday that rising inflation won't trigger an increase in US interest rates any time soon, investors are pricing in the chance of a rate hike in Britain before the end of the year. Sterling rose to $1.7052, up 0.3 percent on the day. The pound also rose against the euro, with the single currency down slightly at 79.96 pence. The currency barely reacted to monthly UK retail sales data for May which showed a fall for the first time since January.
On a year-on-year basis, retail sales were slightly below forecasts but that did little to alter rate hike expectations. "These slightly worse-than-expected figures shouldn't affect the optimistic outlook for the UK economy as there was always going to be a slight drop given the unexpectedly high April reading," said Jake Trask, corporate dealer at UKForex.
Sterling has gained more than 10 percent in the past year on expectations a rapidly improving UK economy would prompt the BoE to raise rates before its peers in Europe and the United States. The rally had stalled in the past month after Governor Mark Carney warned markets in mid-May not to expect swift action.