Sterling dropped and then recovered sharply minutes after new Bank of England Governor Mark Carney told the world he has no plans to raise rates any time soon, but was upbeat on UK growth.
Delivering his first major speech since taking over from Sir Mervyn King, Carney said UK interest rates could remain at record lows for some time to come.
He said the squeeze on households from high inflation is set to fall back, adding "it would not make sense to choke off the recovery by raising interest rates prematurely".
However, he added a "renewed recovery" is taking place in the economy, with jobless rates set to fall, and this provided a boost to the pound even though the Governor tempered this by saying any fall in the unemployment rate might take some time.
From around $1.5470 before the speech, the pound dropped to $1.5458, before jumping back to $1.5532, just shy of its opening level.
Against the euro it was a similar story, dropping from €1.1625 briefly to €1.1616, before surging back to €1.1647, a day high.
Traders said the comments from the Governor had put paid to speculation forward guidance means the Bank will be less accommodating.
Vaughan Atton, corporate FX dealer at UKForex, said: "The City had prima facie misinterpreted ‘forward guidance' as hawkish and positioned for a sooner rather than later interest rate rise.
"However, Carney stressed rates could stay at record lows even if unemployment falls below 7%, and even hinted quantitative easing could be adopted again."
Atton said, following the comments, sterling crosses experienced significant volatility, with GBP/EUR initially falling before retracing the losses and climbing as the positive growth outlook was picked up by traders.
"The whipsaw reaction was also experienced in cable, which fell sharply before recovering moments later. Despite the more dovish tone, Carney's upbeat stance on growth appears to be lending sterling some support to counter the negative sentiment regarding loose monetary policy".
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