London - Sterling traded near a two-month high against the dollar while 10-year gilt yields stood close to a two-year peak on Friday as a raft of improving UK data has prompted markets to steadily bring forward expectations of a rate hike.
Traders, however, warned that the pound could struggle to see further gains as sellers emerge at higher levels.
Sterling was flat at $1.5637, close to Thursday's peak of $1.5652, its highest since June 19.
Some traders said they would start shorting the currency around the 1.5660/90 level, which would act as near-term resistance.
The euro was flat at 85.32 pence, trading close to a 1-1/2 month low of, while against a trade-weighted basket, sterling was at 81.50, its highest since June 17.
Bank of England governor Mark Carney has indicated that under a “forward guidance” plan the bank would keep interest rates at the current record low of 0.5 percent until the end of 2016 when it expects the jobless rate to fall to 7 percent.
But with UK economic data pointing to a recovery, doubts on whether the bank can keep rates anchored for that long are emerging.
Sterling overnight interbank average rates (SONIA)- the very short-term interest rates that form the basis of lending costs to the wider economy - have inched towards pricing in a first rate rise in 18 months, compared with two years on Wednesday.
The two-year SONIA was at 0.5525 percent while the 18-month rate was at 0.48875 reflecting bets of a BoE rate hike in 2015.
“The support for sterling is well-founded. UK data is quite strong and it has caught Carney wrong-footed. Markets don't believe the BoE can keep rates low for three years,” said Arne Lohmann Rasmussen, head of FX research at Danske Bank.
“We expect sterling and gilt yields to rise.”
The 10-year gilt yield was last at 2.67 percent, close to Thursday's peak of 2.713 percent which was its highest in two years, according to Reuters data.
An unexpected division among BoE policymakers about the guidance plan this week, coupled with a string of recent positive economic reports, ranging from rising house prices, retail sales, services activity to an improving job market, has continued to fuel chances of an earlier tightening in policy.
While the outlook for the pound did seem brighter in the near term, strategists said prospects that the US Federal Reserve would start trimming its stimulus programme this year would weigh on sterling.
“Volatility around major turning points ... is to be expected, with the confused sterling reaction to the BoE's new unemployment rate target being one example,” analysts at ING said.
“However, as the dust settles, we retain our strong conviction that the dollar will emerge far healthier.” - Reuters