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LONDON, Oct 20 (Reuters) - Sterling rose against the euro and the dollar on Monday, as traders bought it after last week's sharp losses, with its near-term direction set to be dictated by UK growth data.
Third-quarter gross domestic product numbers on Friday could provide some support for the currency, which has been plagued by increasing doubts in the solidity of Britain's economic recovery in the face of a worsening outlook in Europe.
Before then retail sales numbers, judging by other already released surveys, may support the softer outlook on growth which has led investors to push back expectations for a first rise in interest rates into the second half of next year.
Sterling had its biggest loss in eight months against the euro last week on the back of that repricing of expectations on rates. <0#FSS:>
The uncertain monetary policy outlook has seen the pound shed almost 7 percent against the dollar over the last three months.
But it firmed on Monday, rising 0.3 percent against the dollar to $1.6140, while the euro was down 0.3 percent at 79.07 pence.
"There may be some support from the GDP numbers on Friday," said Jane Foley, a strategist with Rabobank in London.
"But the message from the Bank of England's chief economist on Friday was pretty gloomy: it's going to be very difficult for the UK to raise and the market is I think in that frame of mind. That may put sterling on the defensive against the dollar."
Bank of England chief economist Andrew Haldane said financial markets may be right to bet that the first interest rate hike since 2007 would come in the middle of next year. He also said he was in favour of keeping rates low for longer, given the uncertainties surrounding UK and global economic growth.
Minutes from the BoE's Oct. 9 meeting, due out on Wednesday, will be watched for more of that dovish tone.
Talk among analysts that another member of the nine-strong Monetary Policy Committee might have swung to vote for higher rates has largely evaporated. Two members had backed a rate rise at the previous meeting in September and now there is speculation that both could switch votes.
"The downside risk for sterling/dollar is that the two dissenting voters within the MPC might look at some of the recent economic data and switch their votes," said Jameel Ahmad, chief market analyst for FXTM.
He was referring to a drop in British inflation to five-year lows and a moderation in manufacturing activity.
Traders will keep an eye out for U.S. inflation, also due for release on Wednesday. A softer-than-expected reading could underpin expectations that the Federal Reserve is likely to keep rates lower for longer. That could limit sterling's losses.
Investors are also becoming increasingly wary about political risks in Britain, which they say could have a bearing on investment flows and sterling.
Latest polling shows growing support for anti-EU party UKIP, whose leader, Nigel Farage, said he would demand an immediate referendum on European Union membership as his price for supporting any coalition government after a parliamentary election due in May. (Reporting by Anirban Nag and Patrick Graham; Editing by Susan Fenton)