LONDON - Sterling hit its highest level since the result of the Brexit vote on Friday and was heading for its best week in almost nine years against a currency basket, as investors doubled down on bets the Bank of England would raise interest rates soon.
Comments from BoE policymaker Gertjan Vlieghe echoed the central bank's signal this week that the first rate increase in a decade could happen in "coming months," catapulting the pound past the $1.36 mark for the first time since June 24, 2016, the day of the EU referendum result.
By afternoon trade in London, the currency eased off its $1.3616 high to trade 1.5 per cent up at $1.3588, and on track for a 3.6 per cent weekly gain on a trade-weighted basis - its best performance since February 2009.
Six-month Sterling Overnight Index Average (SONIA) swap rates, which reflect market expectations for interest rates, also hit their highest since the Brexit vote result, at 39 basis points.
"It seems to be a positive time for sterling this week," said David Cheetham, chief markets analyst at online broker XTB.
"We had the higher inflation data on Tuesday, the BoE yesterday, and today we've completed the hat trick: arguably the biggest dove on the MPC (Monetary Policy Committee) coming out in support of a rate hike in coming months if the conditions continue."
Analysts arguing against an imminent hike by the BoE have said the central bank's job has been complicated by wages, which have not kept pace with inflation, and an economy facing the uncertainty of Britain's vote to leave the European Union, making the BoE less likely to move soon.
ING's Viraj Patel argued the BoE's main objective in its communication change was to realign markets towards gradual interest rate rises instead of an imminent one, and that could limit sterling's gains from now on.
"A November rate hike shouldn't be viewed as a sure-fire bet; we suspect that it is largely conditional on two factors: signs of a rebound in domestically generated inflation (namely wage growth) and a reduction in short-term political uncertainty," he wrote in a note to clients.
Brexit has also put sterling back on investors' radars after days of being dominated by moves in the euro and the dollar.
Traders will be watching for a speech on Brexit next week by Prime Minister Theresa May. The next round of Brexit talks with the European Union has been postponed by a week until Sept. 25.
BoE Governor Mark Carney is due to speak in Washington on Monday.
After hitting an almost 2-month high of 87.75 pence per euro on Vlieghe's comments, sterling settled to trade around the 88 pence mark, up 1 per cent on the day.