Sterling was last 0.25% higher at $1.2454, heading back to last week's 10-month high, after data showed British consumer price inflation eased by less than expected in March to 10.1% from February's 10.4%.
Britain now has western Europe's highest rate of consumer inflation.
"This fact, along with the stronger than expected wage growth data yesterday, provide compelling reasons for the BoE to now hike by 25bps at the next meeting on 11th May," said Derek Halpenny head of research, global markets EMEA at MUFG in a note to clients.
However, he added: "With the Fed expected to hike in May and the ECB to hike by more over the coming months, the positive impetus from this data for the pound will likely be contained."
Expectations for higher official rates in a market relative to those elsewhere typically drag money market and government bond yields higher, attracting cash into a country while boosting its currency. The pound also strengthened a little against the euro, with the common currency down 0.3% to 88.03 pence. In broader markets the dollar index , which gauges the greenback against six major peers, ticked up 0.22% to 101.94 after a choppy few days. On Friday, the index had dipped to a one-year low at 100.78. Among major currencies, the dollar's largest gains were against the Japanese yen <JPY=EBS , gaining 0.53% to 134.8 recovering from a 0.29% retreat on Tuesday.
The pair tends to track U.S. yields, and U.S. two-year Treasury yields , which are extremely sensitive to Fed expectations, are at a one month high of 4.261%.
"The market is pretty much resigned to a 25 bps hike at the (Federal Reserve's) May meeting, so it's more the ebb and flow of expectations about rate cuts this year that's causing U.S. bond market volatility," said Ray Attrill, head of foreign-exchange strategist at National Australia Bank. "It's the volatility in the bond market that's driving the dollar, not the other way round." St. Louis Fed chief James Bullard told Reuters in an interview that he leans toward 75 bps of additional tightening, versus the market consensus for one more 25 bp hike next month and then the potential for as many as two quarter-point cuts later this year. By contrast, Atlanta Fed President Raphael Bostic said in an interview with CNBC that he expects just one more quarter point hike, followed by an extended pause. The euro dipped 0.12% to $1.09605, still in sight of last week's 14-month high, and Swiss franc weakened a touch to 0.8975 per dollar <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World FX rates ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Gareth Jones)
