LONDON (Reuters) - Sterling rose above $1.30 for the first time in five weeks on Thursday, with investors taking stock of increasing signs the Bank of England is looking at tightening monetary policy.
After losing more than 2 percent against the dollar when Prime Minister Theresa May lost her parliamentary majority in the June 8 election, the pound has recovered as BoE officials bent towards raising record low interest rates.
The Bank's Governor Mark Carney said on Wednesday that a rise in rates was likely to be needed as the economy came closer to running at full capacity, and that the Bank would debate this in the coming months.
For markets, that ran contrary to comments Carney made last week when he said now was not the time to raise interest rates, when his chief economist Andy Haldane flipped to support a hike later this year.
Sterling strengthened to $1.2995 in early European trade, briefly rising as high as $1.3007 after Haldane told the BBC the bank needed to look seriously at raising rates.
It was last up 0.4 percent on the day at $1.2984 and 0.1 percent higher at 87.90 pence per euro.
"(Carney's comments) have been quite supportive for the pound, particularly against the dollar which is trading around pre-election levels," said Alexandra Russell-Oliver, currency analyst with Caxton FX.
"The market's getting ahead of itself and focusing on the hawkish aspects of his comments. I think (a rate hike) will ultimately depend on how the data unfolds and what developments we see in terms of Brexit negotiations."
Politics remained on investors' radars, ahead of a parliamentary vote on Prime Minister Theresa May's policy programme, watered down after her election setback and growing pressure over her Brexit and austerity plans.
Britain called for a speedy agreement between pro-British unionists and Irish nationalists in Northern Ireland, but the Democratic Unionist Party (DUP) said a breakthrough will not be possible before Thursday's deadline to restore the province's power-sharing government.
The Irish and British governments - guarantors of the 1998 Good Friday Agreement which ended three decades of sectarian violence in Northern Ireland - have warned that a failure to reach an agreement would have "profound and serious" implications and limit the province's influence in Brexit talks.
With a weakening dollar and a strengthening euro, strategists were suggesting investors might now use the single currency to express a bearish take on sterling as Britain enters a period of uncertainty negotiating its exit from the EU.
"With the euro in play, many may feel that the euro also now provides a more suitable vehicle with which to express their politically orientated doubts about sterling: of course, there is just the question of whether the market has placed the appropriate spin on Mr Carney's 'hawkish' comments yesterday," Neil Mellor, currency strategist at Bank of New York Mellon, wrote in a note.
Reporting by Jemima Kelly and Ritvik Carvalho,; Editing by Nigel Stephenson and Alison Williams