June 26, 2017 / 8:21 AM / 7 months ago

Sterling hits 1-week high as government deal nears

* 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 Ritvik Carvalho

LONDON, June 26 (Reuters) - Sterling climbed to its highest in a week on Monday, kept up by rising expectations among investors of a hike to interest rates from the Bank of England and the prospect of a deal for Prime Minister Theresa May to form a government.

Investors have upped their expectations for a hike to record low interest rates in Britain after more BoE policymakers voted towards one at the bank’s last policy meeting. Its chief economist said last week that he expected to vote for a hike later this year.

That has caused the pound to recover part of its losses since May’s gamble on a snap election backfired to produce no clear majority for any party.

The leader of Northern Ireland’s Democratic Unionist Party (DUP), Arlene Foster, will meet May at 0930 GMT on Monday for talks on propping up her government, a DUP spokesman said.

Foster said on Sunday she was close to finalising a deal with May’s Conservative Party.

By 0738 GMT, the pound was up 0.2 percent at $1.2748.

It was 0.2 percent higher at 87.86 pence per euro.

Investors were also digesting headlines over the weekend surrounding Britain’s exit from the European Union.

Brexit minister David Davis said on Sunday he was “pretty sure” he could negotiate a good deal to leave the EU, something that would require a transitional arrangement for around one or two years.

Davis also told members of the Conservative Party to stop being “self-indulgent” after the Sunday Times newspaper reported that leading members of the party want finance minister Philip Hammond to become prime minister in place of May to steer the country through the Brexit process.

Analysts at LMAX flagged political uncertainty over Britain’s government and Brexit as reasons for being cautious on the pound.

“With the government still scrambling and the Brexit negotiations hanging in the balance, there is plenty of good reason to not be getting overly bullish the pound just yet,” they wrote. (Editing by Angus MacSwan and Ed Osmond)

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