Sterling rose to a seven-week high against the dollar on Thursday ahead of a Bank of England meeting, with the central bank expected to rise interest rates once again in a bid to try to tame surging inflation.
Sterling rose in early London trading to its highest point against the dollar since early February after data showed inflation unexpectedly rose last month, leading to bets the BoE will raise rates for the 11th time in a row to 4.25% from 4.0% when it meets at 1200 GMT.
Earlier this month, money markets have priced the chance the BoE would halt rate hikes in March amid transatlantic bank turmoil which culminated in the collapse of three U.S. lenders this month, as well as a Swiss regulator-orchestrated emergency takeover of Credit Suisse by its rival UBS over the weekend.
But changing those expectations, data showed on Wednesday that British consumer price inflation rose to 10.4% in February from January's 10.1%, above economists' forecasts in a Reuters poll and almost back to where it was in December.
Markets are now fully pricing in a 25 basis point hike of the on Thursday.
Also supporting bets that the BoE will raise its benchmark interest rates, there were recent similar moves from a slew of central banks including the Federal Reserve, which rose rates by 25 bps to the 4.75%-5.00% range on Wednesday, and the European Central Bank's 50 bps increase to 3% last week.
"The ECB and Fed rate hikes mean that the chances of the BoE following suit with a 25 bps move today are quite high, even more so following the surprisingly high inflation readings published yesterday," said FX strategist at ING, Francesco Pesole.
Sterling rose 0.3% against the dollar to $1.2302 by 1015 GMT. Versus the euro, it edged up 0.1% to 88.39 pence.
Cable is the best performing G7 currency pair so far this year, bouncing back from a 10.6% tumble in 2022 in a tumultuous year for British assets, while the turbulence in the banking system in the U.S. has weakened the dollar index this month.
(Reporting by Joice Alves; Editing by Angus MacSwan)