Sterling hit its strongest since mid December versus a struggling dollar rising well above the $2 mark on Friday after the Bank of England left rates on hold the previous session.

The pound has gained more than 4 percent against the dollar this year as U.S. interest rates have come down 1.25 percentage points this year and markets are pricing in at least 75 basis points more of cuts by the end of March.

In contrast expectations on the extent of monetary easing in the UK have been pared back slightly as the Bank of England is seen as keen to target inflation.

Since the start of the year, the spread between 2-year UK and U.S. government bonds has widened from around 142 basis points to around 238 (YLD3: Quote, Profile, Research) in favour of Britain.

"The pound has been playing catch-up with U.S. interest rate spreads, people were short sterling at the beginning of the week but it has now started reacting to past moves (in spreads)," said Adrian Schmidt, currency strategist at RBS Global Banking.

By 0816 GMT the pound was up 0.1 percent against the dollar at $2.0126. The euro was up 0.15 percent at 76.40 pence retreating from an all-time high of 76.92 pence, set the previous session.

Stronger than expected UK services PMI data released on Wednesday added to the Bank of England's concerns on inflation and slightly pared back expectations of rate cuts, though three rate cuts are still expected by year-end (FSSZ8: Quote, Profile, Research).

However a report showing that growth in pay settlements held steady in the three months to February will help cool fears that rising living costs could trigger a wage-price spiral.

Sourced by Reuters.