Sterling breezed past the all-important $1.30 mark in afternoon trading in London after a Bank of England policymaker dropped hints about cutting back on quantitative easing - as disappointing US inflation figures put investors off the dollar.
The pound was up more than one per cent against the dollar, at $1.3070, after Ian McCafferty, a policymaker on the Bank of England's rate-setting monetary policy committee, suggested conditions were right for Bank to start to cut back on its £435bn quantitative easing programme.
The currency was also buoyed by an admission from the government it will have to pay off a Brexit bill.
Meanwhile, in the US, figures published today showed inflation fell to 1.6 per cent in June, down from 1.9 per cent in May and below the 1.7 per cent analysts had expected.
Retail sales fell 0.2 per cent, against expectations of a 0.1 per cent rise.
The figures caused investors to speculate the US is not steering as strongly towards an interest rate rise as some had thought.
Earlier this week the dollar fell against the euro after Janet Yellen, chair of the Federal Reserve, suggested the US economy was strong enough to withstand a rate rise.
However, she added that it was unclear when inflation will pick up: "[The rate-setting Federal Open Markets Committee] will be monitoring inflation developments closely in the months ahead," she said.
"Yellen and co may have much to ponder over the coming months as ‘transitory’ deflation is now in its fourth successive month," said Anthony Kurukgy, senior sales trader at Foenix Partners, today.
"After Yellen noted at the recent FOMC meeting that inflation levels were on target for the long term around two per cent, news that June’s level dropped... will surely come as a concern.
"Although Yellen admitted herself that it was too ‘premature’ to speculate on the general Inflation trend, it’s clear that market sentiment has shifted to the side of caution, highlighted in the -0.2 per cent headline figure for June Retail Sales.
"With the correlations of a strong labour market and not ‘very substantial’ upward pressure on wages starting to depict reasoning in downward price shifts, Yellen and co may shift some hawks to seasoned doves."