Sterling strengthened against both the euro and the dollar after UK retail sales rose more than forecast in August, boosting investor expectations that the Bank of England will raise borrowing costs in the coming months.

Sterling hit a three-week high against the euro and climbed towards $1.30 as traders awaited this week’s Bank of England inflation report and policy meeting.

Sterling has fallen to a 31-year low against the dollar and hit a five-year low against the euro on fears of a hard exit by Britain from the EU and prime minister Theresa May’s comments on the impact of loose monetary policy which some saw as a thinly veiled attack on the Bank of England.