Sterling hits three-week high as Fed-BOE policy gap supports gains.The pound climbed to its strongest level in nearly three weeks against the US dollar on Thursday, supported by widening interest rate differentials as markets weigh a more dovish Federal Reserve against a cautious Bank of England.Data on Tuesday showed a smaller-than-expected decline in UK payrolls for July, reinforcing the BoE’s reluctance to accelerate rate cuts. At last week’s policy meeting, the Bank of England pushed back against expectations for further easing, with markets now pricing in less than 20 basis points of cuts by year-end.In contrast, the Fed is seen moving toward renewed policy easing after a lower-than-forecast US inflation reading on Tuesday bolstered expectations for a September rate cut. Markets are almost fully pricing in a 25-basis-point move next month, followed by another in December — a total of about 60 basis points of easing by year-end.The divergence leaves scope for sterling to extend its gains, analysts say, with the BoE’s higher-for-longer stance offering relative yield support while the Fed’s anticipated easing cycle weighs on the dollar. Still, UK economic momentum remains fragile, meaning the pound’s outlook will hinge on incoming growth and inflation data as well as signals from both central banks in the weeks ahead. This article was written by Eamonn Sheridan at investinglive.com.