LONDON (Reuters) - Sterling jumped to a two-week high against the dollar and pulled away from a four-month low versus the euro on Wednesday after minutes from a Bank of England meeting surprised investors who had bet on more signals on policy easing.
Better-than-expected UK jobs numbers and dovish comments from Federal Reserve chief Ben Bernanke also helped sterling as speculators and investors who had bet against the pound before the Bank minutes were released bought the currency back.
The yield gap between 10-year U.S. Treasuries and UK gilts narrowed after Bernanke's comments as U.S. yields fell at a faster pace. That hurt the dollar, which has been buoyed by expectations the Federal Reserve will be the first major central bank to exit ultra-loose monetary policy.
Bernanke told lawmakers on Wednesday that while the Fed still expects to scale back its bond-buying programme later this year, it left the door open to changing the plan if the economic situation deteriorated.
Sterling extended gains to touch a two-week high of $1.5270, up 0.8 percent on the day, and pulling further away from a low of $1.5110 before the Bank minutes were released.
It also recovered lost ground against the euro with the single currency falling from a four-month high of 87.12 pence. It was last trading down 0.7 percent at 86.26 pence.
"Bernanke's comments have helped sterling/dollar but we still think it is a sell-on-rallies," said Richard Driver, currency strategist at Caxton. "This short squeeze can see sterling rise to $1.5300 and a bit beyond but overall the direction remains for a drop towards $1.50."
One reason for investors to stay cautious on the pound is the expectation that the Bank, when it issues a forward guidance in its Quarterly Inflation Report early next month, will pledge to keep interest rates low until a more sustainable recovery is in place.
"One important downside risk for sterling remains that the rate guidance parameters that the Monetary Policy Committee chooses to put in place could signal a more aggressive target for unemployment and greater tolerance for inflation than currently anticipated by the market," said Valentin Marinov, currency strategist at Citi.
"In addition, we suspect that investors would continue to speculate that while (more) quantitative easing may not be on the table as yet, it need not be that far away from the table."
Earlier, the minutes from the bank's July meeting showed all nine policymakers voted against expanding its bond-buying programme, an unexpected change from the previous meeting's 6-3 split and wrongfooting investors who had built large bets against sterling in recent weeks.
Markets were paying particular attention to whether new Governor Mark Carney voted in favour of increasing the 375 billion pound programme.
"The market had been positioned for dovish Bank minutes and clearly they did not get that," said Ian Gunner, portfolio manager at Altana Hard Currency Fund. "The speed of the move suggests that there will be more position adjustments. We are staying clear of sterling/dollar given all the uncertainty."
Reporting by Anirban Nag; Editing by John Stonestreet and Susan Fenton