The US Federal Reserve is on the look out for inflationary pressures as the pound hits a new three-month high against the dollar.

In early trading this morning the pound reached $1.7887, the second day in a row that the pound has hit a quarterly high against its Atlantic neighbour.

The pound was lifted by speculation that the latest report from the CBI, due out later this morning, will show an improvement in the balance of orders following a slight pick-up in the all important eurozone.

Analysts however remain unconvinced about sterling's prospects, with Simon Derrick, head of currency research at the Bank of New York, telling Reuters: "There are still question marks over the retail sector and in particular of the discounting that's taking place."

In the US meanwhile, the Fed has hinted that its policy of interest rate increases might not be over.

"Fed speakers are saying they are going to be vigilant on inflation and if the data suggests they haven't done enough, they will do more,''
Steve Barrow, chief currency strategist at Bear Stearns, told Bloomberg.

The Fed raised the cost of borrowing no less than eight times last year in a bid to stave off inflationary pressures.