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LONDON (Reuters) - Signs more stimulus from the Bank of England is now off the cards drove sterling to a 19-month high against the euro and a two-week high against the dollar on Wednesday.
Minutes from the bank's last policy meeting showed it voted 8-1 against further stimulus, with one policymaker who had consistently voted for more monetary stimulus moving out of the dovish camp and another now seeing the decision as "finely balanced".
That wrong-footed many investors who had geared up for a dovish set of minutes and lifted the pound across the board, pushing it up around 0.7 percent on a trade-weighted basis.
More quantitative easing is considered to be negative for the currency as it involves flooding the market with sterling.
"Having expected the voting pattern to match last month's outcome, the markets were surprised by arch-dove Adam Posen's change of heart, voting for no change to the quantitative easing programme," said Alex Lawson, senior broker at Moneycorp.
"The one member who voted to expand the Bank's asset purchases, David Miles, said that his decision was finely balanced - reducing the chances for more stimulus in the coming months."
The euro fell 0.7 percent to 81.85 pence, its lowest level since end-August 2010, breaking past reported option barriers at 82 pence. Near term support for the euro is around 81.43 pence, a level seen on June 23, 2010. A break below that could see it ease towards the 80 pence level.
"We stick with our view that euro/sterling breaks below 80 pence," said Chris Turner, head of currency strategy at ING.
"We have been very positive on sterling all year, but progress to the upside has been frustratingly slow. This probably owes to the UK's status as an old economy undergoing necessary re-balancing towards the external sector - plus an external sector skewed to the eurozone."
Given the UK's large exposure to the crisis-hit euro zone, both through trade and financial links, sterling has often found it tough to rally against the safe-haven dollar.
But on Wednesday, sterling rose to a two-week high of $1.5994, with stops above $1.60 holding for now. Traders said Asian central banks were selling the British pound at higher levels.
Still, the medium term trend for sterling looked bullish on the charts with some pointing to a "golden cross", with the 55-day moving poised to cross the 200-day moving average.
A golden cross would be formed if the former rises through the latter and last time it happened in September 2010, sterling rose from around $1.5400 to above $1.6500.
reporting by Anirban Nag; editing by Patrick Graham