Sterling jumped across the board after the Bank of England's latest report said inflation is likely to remain above target for longer, fuelling expectations the MPC will act sooner to tackle price rises.
Sterling's rebound against the dollar from yesterday's low of $1.6315 extended about 80 pips to reach fresh week-highs of $1.6485 just after this morning's quarterly inflation report.
Bank governor Mervyn King used the report to reiterate CPI inflation is likely to rise above 5% this year, with higher than forecast energy prices hitting consumers and pushing up forward projections.
"It is more likely than not to remain above the 2% target throughout 2012," he said.
Higher CPI increases the pressure on the Bank to raise rates sooner rather than later, though King has cautioned a rise could destabilise the recovery.
The revised expectations saw the pound trading higher across the board-notching good gains against the dollar, euro, yen and Swiss franc.
Markets are now fully pricing in the first rate increase in December, with a 94% chance of a rate rise in November.
Ahead of the report, a 0.25 percentage point increase was fully priced in only in January next year.
Interest rates are at an all-time low of 0.5%.
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