The pound extended its advance and government bonds fell after Bank of England officials highlighted the potential drawbacks of negative interest rates.
The currency climbed to the highest since March, bonds slipped across the curve and money markets trimmed bets on further cuts to price in a move to zero in September next year.
"The BOE have reiterated that for now they will stay away from sub-zero rates," said James Athey, a money manager at Aberdeen Standard Investments. "At the margin, that's enough for a little pop in the pound, before moves go back to being all about the dollar."
The central bank said it won't tighten policy until inflation moves to its target of 2%, and kept its bond-purchasing program unchanged. It will slow its pace of asset purchases to £4.4 billion ($5.8 billion) a week starting Aug. 11, from £6.9 billion. That added further pressure on bonds.
Sterling is coming off the back of its strongest July since 1990, thanks to a weakening dollar. It has made up for its losses since COVID-19 led to lockdowns in March, when the currency nosedived to its lowest level in 35 years and policymakers rushed to slash interest rates.
The currency rose as much as 0.5% to $1.3183, the highest since March 9, before paring the gains.
Economists surveyed by Bloomberg expect the central bank's asset-purchase target to be increased again by the end of this year. Markets have been given confidence by the BOE's buying soaking up some of the government's extra borrowing to fund its crisis response. That's helped push the yield on 2-, 5- and 10-year bonds to record lows recently.