Bumper retail sales buoyed sterling to a five-month high against the dollar and a 20-month high versus a trade-weighted basket of currencies on Friday as investors become more optimistic about the outlook for the UK economy.
The pound looked on track for more gains as it hovered just shy of a 20-month high against the euro, leaving open the prospect of a move towards the 80 pence level as investors seeking to exit the euro look to UK assets as an alternative.
There has been a gradual build of stronger appeal for sterling at a time when the euro zone situation is catching the headlines and is a worry, said Audrey Childe-Freeman, global head of currency strategy at JP Morgan Private Bank.
Data showed British retail sales jumped 1.8 percent in March, the highest jump in more than a year and well above economists' forecasts for a rise of 0.5 percent.
This will boost hopes that figures next week will show the UK economy avoided slipping into technical recession in the first quarter, adding to a growing view that the Bank of England is less likely to opt for further monetary stimulus.
The pound rose as high as $1.6121 against the dollar, its strongest since last November, as the strong retail sales number propelled it above a reported options barrier at $1.61, traders said.
This helped buoy trade-weighted sterling to 81.3, matching a peak on August 23, 2010, Bank of England data showed.
The pound has posted strong gains this week after Bank of England minutes on Wednesday suggested the chances of further quantitative easing had dimmed.
The minutes revealed an 8-1 vote against further stimulus. Policymaker Adam Posen, who had consistently voted for more stimulus, moved out of the dovish camp, while another rate-setter now saw the decision as finely balanced.
Speaking on Thursday, Posen said although some survey data had weakened in the past month, overall it confirmed an upward trend in Britain's underlying growth, and gave him confidence the economy did not need additional stimulus.
MORE GAINS NOT A GIVEN
The euro was at 81.86 pence, just shy of the low of 81.62 pence hit Thursday, its weakest since late August 2010.
The first round of the French presidential election on Sunday could be another negative for the euro. Financial markets are concerned that Socialist Francois Hollande, who looks set to win, may keep a looser grip on the government purse-strings than current President Nicolas Sarkozy.
Further falls would see the common currency target 81.43 pence, a level also not seen since August 23, 2010, and then 80.67 pence, the low struck in June of the same year.
However, some analysts are wary. The British economic recovery remains fragile, particularly given the country's high levels of debt and its close trade links to the euro zone.
Sterling is having its day in the sun, but I think sterling/dollar could be toppish here, said Nick Beecroft, senior markets consultant at Saxo Bank.
The UK is an island geographically but it is not an island economically and its fate will also be dependent on what happens in the rest of the world, he said.
Sterling looks on track to extend its gains against the dollar if it closes the week above its 200-week moving average, a key chart indicator, currently at $1.5959. Its next target is the October 31 high of $1.6167 and a move above there could see it on course for a move towards $1.64.
Technical analysts said the 55-day moving average in sterling/dollar (now at $1.5850) crossing above the 200-day average (now at $1.5842) was a bullish signal that may give room for more gains. This phenomenon is known as a 'golden cross'. When it last happened in September 2010, the pound rose from around $1.5400 to touch $1.6300 within two months.
(Editing by Hugh Lawson)