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LONDON (Reuters) - Sterling inched up against the dollar on Friday, ending the week just a touch higher than where it began as political and economic worries counterbalanced the surprise of three Bank of England policymakers voting in favour of a rate hike.
Sterling surged to its highest in a week against the euro on Thursday after it emerged that the central bank's monetary policy committee had seen a 5-3 split on whether to raise interest rates immediately, amid rapidly increasing domestic consumer prices.
At a time when the BoE has blamed the rise in inflation past its 2 percent target mainly on a weak pound, traders read the split vote as a warning that officials could seek to defend the currency with rhetoric or action, even as the economy overall slows.
The pound has fallen over 15 percent since last June's vote for Brexit, although it has recovered some ground since the 31-year lows hit in October and even popped above $1.30 last month on bets that the Conservative party would increase its parliamentary majority in elections held last week.
However, with no party taking a majority, the pound sank as investors worried that a minority government would bring turmoil and could weaken Britain's hand in exit negotiations with the European Union.
Canadian bank BMO on Friday said it was revising down its 12-month forecasts for the pound, to $1.32 from $1.37 before, and that it would fall further in the coming months.
"We expect sterling to fall to $1.24 in three months and $1.23 in six months, on a combination of domestic political tensions, a rocky start to the Brexit negotiations and general dollar strength over the next few months," BMO strategists wrote in a note to clients.
"We think the UK election result has raised the chances of the UK exiting the EU with a bad deal and made a swift Brexit process less likely," they added.
On Friday the pound edged up 0.2 percent to $1.2780, though it slipped 0.2 percent from its perch against the euro, to 87.60 pence.
In trade-weighted terms, the pound was flat, having fallen over 2 percent over the past month.
Data released this week showed wage growth in February-April was much weaker than expected at 2.1 percent, squeezing consumers as inflation in May jumped to a four-year high of 2.9 percent.
"Dollar demand ..., political uncertainty in the UK post-election, the Brexit negotiation overhang and depressed wages should make it difficult for the UK currency to run much higher right now," said Joel Kruger, an analyst with LMAX Exchange in London.
But he also said that technical analysis of sterling painted a more optimistic picture.
"The latest round of setbacks are viewed as corrective with the market expected to be very well supported on dips ahead of $1.2500," he said, pointing to the possibility of a rebound to $1.35 in the weeks ahead.
Editing by Hugh Lawson, editing by David Evans