"There is a strong argument in favour of holding sterling, with the economy
doing well and interest rates going up," said Ken Wattret, a senior economist at Paribas Capital Markets. "You get paid for holding sterling and you'll probably get paid more [as rates rise]," he said.
The pound rose to its highest level ever against the euro on Friday, leaving it up 9.6 per cent since the single currency's introduction at the beginning of the year. The euro was at 0.6406 pound, after dipping as low as 0.6377.
The pound gained 0.26 per cent against the dollar last week, and it was at $1.6235 on Friday compared with $1.6245. Britain's currency is up 4.4 per cent since slumping to a three-year low on 12 July.
Sterling could rise as high as $1.70 by the end of the year, predicted Steve Barrow, a currency strategist at Bear Stearns International.
Traders bought pounds last week after reports showed retail sales rose more than expected in August, while the unemployment rate dropped to its lowest level in 19 years. Those figures suggested the economy may expand fast enough to prompt the Bank of England to raise interest rates at least one more time before the year ends.
"The factors that pushed rates upward earlier in the month haven't gone away," said Mr Wattret at Paribas. "We'll probably see another rate rise in November. The tightness of the labour market was reflected in another bigger-then-expected decline in the jobless rate. At the same time retail sales data is still pretty strong."
Of 15 economists surveyed, 11 expect the central bank to lift the repurchase rate to 5.50 per cent in November. In a signal that futures market investors agree with those economists, the yield on interest rate futures contracts expiring at the end of the year is 65 basis points higher than the current three-month lending rate.
The Bank's surprise rate increase earlier in the month "may give a signal to the market that the Bank of England will be pro-active in rate moves in the future", said Uwe Fuehrer, head of currency sales at Credit Agricole Indosuez. "That may give the pound some underlying support."
Three-month pound-denominated deposits offer investors only eight basis points fewer than those in the dollar, while they offer investors 273 basis points more than euro deposits.
Reports in the week ahead on trade and industrial trends, as well as the minutes from the central bank's September MPC meeting, might give the pound added lift.
The trade deficit with the rest of the world is expected to have narrowed in July, while the current account probably narrowed in the second quarter.
The August industrial trends survey, released last month, showed UK manufacturers were more sanguine about their prospects than they had been in two years.
September's report will be released on Thursday.
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