London - Sterling rose to an eight-month high against a weaker dollar on Monday after Lawrence Summers, perceived by the market as more likely to favour a quick scaling back of monetary stimulus, pulled out from the race to be the next Fed chief.
The pound was expected to stay strong on the back of recent solid UK data, which has caused investors to bring forward expectations of when the Bank of England will raise interest rates.
Sterling rose to $1.5958, its strongest since mid-January, though traders expected it to run into offers ahead of a reported options barrier at $1.60.
The dollar fell broadly on the Summers news, which could leave Janet Yellen as the front-runner to be the next chair of the Federal Reserve.
Yellen is seen by financial markets as less likely to rapidly reduce US bond-buying.
Markets were gearing up for the Fed to taper back its $85 billion monthly bond-buying stimulus following the September 17-18 meeting.
“Sterling/dollar has been given a leg up on the Summers news, but the reaction could be a little extreme,” said Jeremy Stretch, head of currency strategy at CIBC.
“Sterling has had a stunning rally over the last six months and we probably need to see consistently strong UK data for that to continue.”
The euro was down 0.1 percent at 83.83 pence, having hit an eight-month low of 83.56 pence on Friday.
Stretch said focus in the UK this week would centre on Thursday's retail sales numbers for August. If strong these could see the pound rise towards $1.6020 against the dollar and 83.33 pence per euro.
This equates to 1.20 in sterling/euro , a level around which UK companies often look to sell the pound.
UK inflation data and Bank of England minutes are also due on Tuesday and Wednesday.
“We cannot rule out further upside in sterling/dollar, with a rise to the $1.60 level possible. There is the risk that stronger-than-expected retail sales (Thurs) or CPI (Tues) push sterling higher,” Morgan Stanley analysts said in a note to clients.
Recent strong UK data has led markets to price in a rise in interest rates well before the Bank of England has flagged, possibly as soon as late 2014.
The BoE has said it does not plan to raise interest rates before UK unemployment falls to 7 percent, which it does not forecast to happen until late 2016. - Reuters