Sterling rallied strongly on Thursday after the Bank of England (BoE) struck a more hawkish tone despite keeping interest rates on hold at 0.5%.
BoE Governor Mark Carney warned that UK interest rates would likely need to be “tightened somewhat earlier and by a somewhat greater extent” than previously expected.
The pound jumped on the comments, up by around 0.77% on the session against the dollar as at 1300 GMT.
Investors factored in a higher chance of a 0.25% interest rate rise in May, following on from the 0.25% rate rise of November that took UK base rates to 0.5%.
November´s rate rise was the first in a decade against the backdrop of accelerating UK inflation.
Although UK and eurozone inflation eased slightly in December, US consumer price data released in January pointed to a meaningful pick up in US inflation.
Figures released last Friday showed strong US payrolls and rising wage inflation.