April 18, 2017 / 8:57 AM / 4 months ago

Sterling hits 8-week high versus euro on French election worries

* Graphic: sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Jemima Kelly

LONDON, April 18 (Reuters) - Sterling strengthened broadly on Tuesday, hitting its strongest in eight weeks against the euro, as investor nerves shifted from Britain's exit from the European Union toward France's elections and the U.S. economy.

With less than a week to go before the first round of a French presidential election in which the top four candidates are polling neck-and-neck, the single currency was struggling broadly and fell to as low as 84.51 pence, the weakest since late Feb. 24.

Opinion polls suggest the election will come down to a final battle between independent centrist Emmanuel Macron and Marine Le Pen, head of the anti-European Union and anti-immigrant National Front.

But the race has tightened in the past two weeks, with a surge by far-left candidate Jean-Luc Melenchon - who wants to renegotiate France's position in the EU - sparking worries that voters could be left with a choice between the hard-left and hard-right in the second round on May 7.

Against the dollar, the pound hit a three-week high of $1.2608, as the greenback weakened broadly on doubts that U.S. President Donald Trump's administration would push through the fiscal stimulus that had supported the currency in the aftermath of his victory in November.

That left sterling up 1.5 percent in the past month, but still over 15 percent weaker than before last June's vote for Brexit.

"A lot of the bad news for the pound on the UK side is priced in (and) the lack of fresh catalysts for further pound weakness is supportive," said MUFG currency strategist Lee Hardman.

"On the U.S. side, a lot of good news is priced in (but) the U.S. economy has started the year on a weaker-than-expected footing and there's a dampening of expectations that the Trump administration will be able to put in place the plans for fiscal stimulus going forward."

Data released on Friday showed that despite few fresh developments in Brexit negotiations, speculators added to their bets against the pound in the week up to last Tuesday, with net short positions rising close to a record high.

"Sterling short positioning remains close to this year’s extremes, irrespective of spot trading near the upper end of the last few months’ trading range," wrote Credit Agricole strategists in a note to clients.

"Unless this week's data, such as retail sales, makes a case of rising central bank easing expectations, additional upside risks cannot be excluded. From a broader angle we expect rallies to remain a sell although better levels may be reached for this."

Editing by Tom Heneghan

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