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LONDON (Reuters) - Sterling climbed to its highest against the dollar since late September on Friday, brushing off data showing a sharp slowdown in UK economic growth as traders closed off heavy bets against the pound ahead of a long Bank Holiday weekend.
Numbers from the Office for National Statistics showed Britain's economy slowed to a one-year low in the first three months of 2017, as higher inflation - in large part caused by sterling weakness following last year's Brexit vote - hurt retailers and other consumer-focused businesses.
But sterling, which had already been trading up on the day before the data was published, showed little reaction, hitting a seven-month high of $1.2957 before paring some of those gains.
It was last up 0.3 percent on the day at $1.2945 by 1534 GMT.
"Basically, the bad number was more or less priced in," said CMC markets analyst Michael Hewson, who is bullish on sterling and thinks it could go up to $1.33 in coming weeks.
"This data doesn't include the March data which was actually slightly better ... so the likelihood is the data is going to get revised up."
Rabobank currency analyst Jane Foley attributed sterling's move upward to the fact that short positions on the pound were close to record highs, making "short squeezes" - when traders close out those positions, pushing up the value of the currency - more likely.
On the last trading day of April, the pound was up almost 3 percent versus the dollar on the month - its best performance since March 2016, before the vote for Brexit. Analysts have noted a trend of sterling appreciation in April, largely put down to a heavy month of dividend payments by British companies and the end of the UK tax year.
The pound is now down less than 14 percent against the dollar since last June's referendum on European Union membership, having fallen as much as 23.5 percent to a 31-year low of $1.1491 in October.
Sterling jumped as much as 4 U.S. cents last week when Prime Minister Theresa May called a snap election for June 8, with traders betting that if the ruling Conservatives can get a much bigger majority than their current 17, which is widely predicted in the polls, that will bring political stability.
Some analysts also reckon that a strong majority would strengthen the government's hand in its exit negotiations with the EU, thereby reducing the chances of a "hard Brexit" in which Britain loses any kind of preferential access to the European Single Market.
"The assumption that Britain’s June election will deliver a clear victory for Theresa May and place Brexit negotiations on a firmer footing has fundamentally shifted attitudes towards the pound," said David Lamb, head of dealing at FEXCO Corporate Payments.
Despite the euro being boosted by better-than-expected inflation numbers, sterling edged up against the single currency, up 0.1 percent to 84.19 pence.
Reporting by Jemima Kelly and Ritvik Carvalho; Editing by Catherine Evans