LONDON (Reuters) - The British pound rose against the dollar on Monday, trading briefly at its highest level since Feb. 2, as investor confidence that the Bank of England would raise interest rates in May increased.
The pound rallied last week after Britain secured a Brexit transition deal with the European Union, official data showed British workers’ wages growing at their fastest rate in nearly 2-1/2 years and the BoE confirmed its hawkish tilt.
On Friday, monetary policy committee member Gertjan Vlieghe indicated that the bank base rate would need to rise one or two times each year in the current tightening cycle.
“The pound continues to trade on a firmer footing following on from last week’s favourable developments,” Lee Hardman, an FX strategist at MUFG said.
However, Hardman said the UK rate market had already priced in the May hike as well as one more later this year and “there is now a higher hurdle in the near-term for further pound gains on the back of changes in BoE policy expectations alone”.
Markets are pricing in a 62 percent chance of a May interest rate rise, less than the more than 70 percent chance given a few weeks ago. Some sterling bulls were disappointed that the BoE last week reiterated that rates would only rise gradually and if economic data is weaker-than-expected before May then the central bank is less likely to tighten its monetary policy.
The pound climbed as much as 0.7 percent to $1.4235, its best level since Feb. 2. It later gave up some of those gains to trade up half a percent at $1.4210 by GMT 1535.
The pound briefly soared above $1.43 in January to its best level since it plunged in the aftermath of the vote to leave the European Union in June, 2016.
Against the euro, sterling fell 0.1 percent to 87.46 pence per euro after it earlier had 0.2 percent to 87.280 pence per euro.
ING analysts said in a note that if trade war tensions do not escalate this week and equity markets stabilise, two factors which would be expected to support buying of currencies like the pound, sterling could push higher towards between $1.4250 and $1.43.
Societe Generale said sterling versus the dollar would likely remain in a range, with $1.50 “probably excessive”.
Reporting by Tommy Wilkes; Editing by Matthew Mpoke Bigg