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.
Against the backdrop of accelerating global growth, the European Central Bank also used its recent meeting to strike a more hawkish tone, despite keeping its interest rates on hold.
Meanwhile, with $1.5tn of tax cuts to work there way through the system and US monthly data currently pointing to accelerating momentum this quarter, the Federal Reserve appears increasingly likely to raise US interest rates in March.
Although the BoE´s Monetary Policy Committee unanimously voted to keep rates on hold on Thursday, the BoE struck an upbeat tone on the global outlook.
“The expansion is becoming increasingly broad-based and investment driven. Notwithstanding recent volatility in financial markets, global financial conditions remain supportive,” said the BoE.
UK 10-year gilt yields jumped by 3.3% on Thursday to stand at around the 1.6% mark.