LONDON Sterling hit a one-week high against the dollar on Thursday on stronger-than-expected UK retail sales data and after a Bank of England policymaker said interest rates could rise as early as next year.
Retail sales volumes rose 0.6 percent on the month in September, supporting hopes that the economy recorded strong third-quarter growth. Preliminary gross domestic product data is released on Friday next week.
Sterling rose 0.9 percent on the day to $1.6094, its highest since October 9 as it pulled well above a one-month low of $1.5894 struck late on Wednesday.
Further gains could see it approach the October 1 peak of $1.6260.
The dollar fell broadly following a last-minute deal that postpones the threat of default, as attention turned to concerns about the economic impact of the 16-day government shutdown and the prospect that the U.S. Federal Reserve may delay withdrawing monetary stimulus until into next year.
"We had constructive UK jobs data on Wednesday and good retail sales data today. You have to be optimistic going into next week's data," said Nawaz Ali, market analyst at Western Union Business Solutions.
"If we get good news from the UK and a delay in tapering in the U.S., we could see $1.60 as the base case scenario for sterling/dollar going into year end."
A string of recent solid UK data has helped lift sterling as investors have brought forward their expectations for when the Bank of England will raise interest rates.
BoE chief economist Spencer Dale said in an interview with the Guardian newspaper that the central bank could raise rates in 2014, two years earlier than its August forecasts implied, if growth continues to strengthen.
The sterling overnight interbank average (SONIA) rate curve showed investors were pricing in the risk of an interest rate hike within 15 months..
However, some analysts said sterling gains may be limited because a lot of the good news on the UK economy was already priced in to the currency. The pound gained nearly 8 percent against the dollar between early August and early October.
"We believe the market is pricing in the most optimistic scenario, opening the potential for disappointment ... Failure to sustain gains above the $1.6050 level is likely to return the pressure to the downside," Morgan Stanley analysts said in a note to clients.
The euro fell 0.1 percent to 84.71 pence. However, it remained close to last week's peak of 85.10 pence.
(Editing by Hugh Lawson)