LONDON Sterling held above $1.25 on Wednesday as warnings about the economic impact of Brexit failed to reverse the positive effect of suggestions that Britain's economy could sustain interest rate rises.
A Bank of England survey on Wednesday indicated that employers this year plan to offer the least generous pay deals since 2012, while deputy governor Jon Cunliffe said business investment was likely to remain very weak in the near term.
However, not everyone at the BoE is convinced that Britain's economy will start to run out of steam.
Kristin Forbes - the most sceptical of the bank's policymakers about the need for its huge stimulus programme - said on Tuesday that August's rate cut might need to be reversed soon if growth remained solid and inflation picked up.
At its meeting last week, the BoE voted unanimously by 9-0 to keep rates on hold at a record low of 0.25 percent, but raised its 2017 growth forecasts further.
"The BoE is unlikely to raise rates soon, but it could become more likely later this year if growth holds up, inflation expectations continue to rise, and wage growth proves stronger than expected, which would offer more support for the pound," said Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi UFJ.
The pound was flat against the euro but up 0.2 percent at $1.2535 on Wednesday, having bounced back strongly from a two-week low of $1.2347 hit on Tuesday.
After that wild ride, three-month implied volatility - options contracts that allow traders to bet on or hedge against swings in the currency - rose to its highest level since mid-January.
Strategists warn that any further upside for the pound may be capped by concerns about a hard break between Britain and the EU, which polls suggest has also increased support for Scottish independence.
Ministers pushed back attempts to give lawmakers more say on the terms of the final Brexit agreement on Tuesday, clarifying that they would not seek further talks with the European Union if parliament rejects the exit deal.
Support for Scottish independence has risen since British Prime Minister Theresa May came out last month in favour of Britain making a clean break when it leaves the EU, an opinion poll indicated on Wednesday.
Scotland's devolved parliament rejected May's plans for how to exit the EU in a symbolic, non-binding vote on Tuesday, a demonstration of the divisions between London and Scotland over Brexit.
(Editing by Kevin Liffey)