London - Sterling hovered close to a seven-month high against the dollar on Thursday after the Bank of England's chief failed to dent market expectations that interest rates will rise sooner than the central bank has flagged.
UK bond, or gilt, yields dipped, in line with German Bunds, but short-dated rates continued to suggest the market is pricing in the risk of a rate rise as early as late 2014, following a string of recent firmer British data.
The Bank has said - in giving what is known as forward guidance - that interest rates will not rise until the third quarter of 2016. Markets have been betting his is too pessimistic and, speaking before the UK parliament's Treasury Committee, Governor Mark Carney said the British economy was gaining momentum.
“Near-term momentum is still for a higher sterling across the board, supported by a much stronger-than-expected cyclical recovery which is lifting short-term rates higher,” said Lee Hardman, currency economist at BTMU.
“There is less of a clear signal coming from the BoE over their discomfort at the level of short-term rates, which is helping the pound.”
Analysts said sterling and gilt yields would remain relatively elevated, but may struggle to rise much more from here. Since early August, the pound has gained more than four percent against a trade-weighted basket of currencies.
Sterling was down 0.1 percent at $1.5800, having earlier hit $1.5832, its strongest since early February.
Traders reported an options expiry later in the day at $1.5800 which may keep the pound hovering near that level for now. Analysts also expected it could face stiff chart resistance on the approach to $1.60.
Hardman said there was a limit to how much higher short-term rates could go in terms of pricing in earlier rate hikes, which would mean sterling would struggle to rise much above $1.60.
Short sterling futures have shifted to price in a good chance of a rate hike before the end of next year.
Against a basket of currencies, sterling stood at 82.6, matching Wednesday's eight-month peak.
The pound rose against the euro but stayed below Wednesday's 7-1/2 month peak of 83.83 pence.
The euro was last down 0.15 percent at 84.05 pence.
Gilt futures were 53 ticks higher at 107.87 and 10-year gilt yields were six basis points lower at 2.95 percent, near a 2-year peak just above 3 percent struck earlier this week.
Sterling has been boosted against the euro by the rising spread of 10-year gilt yields and those of German Bunds.
This spread held steady at 96 basis points, having hit a three-year high above 100 basis points earlier this week.
Sam Hill, fixed income strategist at RBC said the resilience of the gilt market in the face of better-than-expected jobs data on Wednesday suggested the market was now “more than adequately priced for good news”.
A 3.75 billion pound auction of benchmark 10-year gilts went relatively smoothly, drawing bids worth 1.59 times the amount on offer. That provided some relief after Tuesday's poorly-received auction of 30-year debt. - Reuters