March 15, 2017 / 9:29 AM / 4 months ago

Sterling hits two-week high on BoE lifeline

An English ten Pound note is seen in an illustration taken March 16, 2016.Phil Noble/Illustration/File Photo

LONDON (Reuters) - The pound hit a two-week high against the dollar on Friday, drawing confidence from signs that some at the Bank of England may be leaning toward a rise in interest rates to support the currency.

Minutes from the Bank's latest Monetary Policy Committee meeting shocked markets on Thursday by showing one outgoing official voting for a rise in rates, and others on the verge of doing so if inflation gets much higher.

That seemed incongruous after a month where the hard numbers have finally begun to point to a weakening of economic growth, as consumers face the effect of a 20 percent fall in the pound, a weaker housing market and uncertainty over jobs and investment as the government gets ready to launch Brexit talks.

Analysts said the turn away from the support the Bank gave the economy with a cut in rates last August was probably chiefly due to the need to avoid another sharp fall in the pound.

"To me this was the sound of them prioritising concerns about inflation and inflation expectations over any impact on demand," said Hamish Pepper, a currency strategist with Barclays in London.

"They know the currency has fallen a lot and they know that is going to add to imported price pressure. The worry is whether that is starting to have an impact on inflation expectations. I think they are quite happy to have the market price in some chance of a rate rise over the next year or two."

Short sterling futures for next March have shifted by six basis points since the bank's statement on Wednesday and now price in a single rise in interest rates over the next 12 months.

That should offer the pound some support as it heads into a period of renewed political pressure when Brexit talks start next month.

A number of major banks have forecast sterling will fall below $1.20 in the months ahead but, helped by the BoE, it has this week ridden out political noise around a new Scottish independence referendum and the risks of a poor Brexit deal.

It traded as high as $1.2399 on Friday, its strongest since March 1. By 1643 GMT it was slightly below that high at $1.2384, still 0.2 percent higher on the day.

Against the euro, sterling climbed half a percent to 86.73 pence.

"It is clear that Brexit fears are definitely helping the central bank as the pound remains weak," said Peter Rosenstreich, head of market strategy at online bank Swissquote.

"We maintain our bullish view on the pound and we see European uncertainties growing in the medium term, in particular given the French elections."

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

Editing by Mark Trevelyan

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