The pound has surged to a two-year high of $1.3420 against the US dollar, driven by growing divergence in interest rate expectations between the Bank of England and the Federal Reserve.

While both central banks are expected to cut rates this year, markets now price in three Fed cuts versus just one from the Bank of England, creating a yield differential that is attracting capital flows into sterling-denominated assets.

"The pound is benefiting from a perfect storm of positive factors," said the head of FX strategy at HSBC. "Relative monetary policy, improving economic data, and reduced political risk premium following the stability of the current government."

The appreciation is a mixed blessing for British businesses. Importers and consumers benefit from cheaper foreign goods, but exporters face margin pressure. The FTSE 100, with its heavy exposure to overseas earnings, fell 0.4 per cent as the stronger pound eroded the sterling value of dollar-denominated revenues.

Currency strategists at Goldman Sachs have raised their year-end sterling forecast to $1.38, citing what they describe as a "structural re-rating" of the UK economy in international markets.