Sterling was back at one-month highs against the eurozone currency as markets awaited the interest rate decision from the Bank of England.
Soaring inflation and low unemployment has raised expectations that more that two of the nine MPC members could vote for an immediate base rate hike from 0.25 per cent to 0.5 per cent.
The pound tends to strengthen when the chance of an interest rate increase is higher.
Bank of England chief economist Andy Haldane is thought to be one MPC member who could join Michael Saunders and Ian McCafferty in calling for rates to rise.
Some experts think that Governor Mark Carney may also shock markets after last month warning that markets are underestimating the likelihood of a rate rise.
If the Bank of England chief votes for a rise, the pound would likely surge against both the euro and the US dollar.
The chance of a rate hike is thought to have jumped after inflation hit 2.9 per cent in August – well above the Bank’s target of two per cent.
Raising interest rates can help push inflation down – taking pressure off British households.
Unemployment has also reached a 42-year low, suggesting the economy remains strong – and wage rises may soon start to pick up.
The factors all suggest the Bank of England could now be finally ending the decade of record low interest rates, according to experts.
Kathleen Brooks, research director at City Index, said: “If the Bank of England won’t step in to ease the pressure on the consumer now, then when will it?
“While we doubt that a rate rise is on the cards for later this week, we believe that there is a chance that the vote split could signal a hawkish shift at the Bank, with the potential for chief economist Andy Haldane to vote for a rate hike.
“It is also interesting to see how the Governor votes.
“Although he has been concerned about growth, in a speech in June he mentioned the fact that the BOE could not ignore rising prices indefinitely.
“Is now the time for the Governor to put his money where his mouth is and actually vote for a rate hike? If yes, then sterling is likely to fly high, with $1.35 a possibility for GBP/USD.”
Craig Erlam, senior market analyst at Oanda, said: “The rally in the pound over the last week or so and the moves after yesterday’s CPI release would suggest traders are pricing in an increasing likelihood of a rate hike over the next 12 months.
“Should any more policy makers join Ian McCafferty and Michael Saunders in voting for a rate hike tomorrow – such as Andy Haldane…