February 6, 2018 / 10:26 AM / 10 months ago

Sterling recovers from two-week lows before central bank meeting

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

LONDON, Feb 6 (Reuters) - Sterling recovered on Tuesday after falling to a two-week low during Asian trading, as investors looked to a central bank meeting on Thursday where policymakers may signal an increase in interest rates as early as May.

Market strategists said the Bank of England’s forecasts about the economy might prompt investors to add positions in an undervalued currency. They discounted the effects of the global stock market sell-off over the past 48 hours.

“This is some unwinding of some large flows into the equity markets rather than some structural reassessment of the market, and that is why the spillover impact on other asset classes such as currencies is limited for now,” said Viraj Patel, an FX strategist at ING in London.

Sterling gained a quarter of a percent to $1.40 in early London trading, after dropping to a two-week low of $1.3937 in Asia. It has fallen nearly 3 percent since peaking at $1.4346 on Jan 25.

The gains came despite a series of discouraging events. World stock markets plunged for a fourth day running on Tuesday, bringing their cumulative losses to $4 trillion.

Also, a report showed the British economic growth is likely to slow to 0.3 percent in the first quarter, down from 0.5 percent in the last three months of 2017, according to financial data firm IHS Markit.

And the European Union’s Brexit negotiator bluntly called on the British government to clarify what it expected its relationship with the EU to be after Britain leaves in March 2019. Without a customs union and outside the single market, barriers to trade are inevitable, Michael Barnier said .

Still, investors were wary of chasing the currency lower before a Bank of England meeting later this week. Expectations for an increase in interest rates are likely to be revised, with several banks now calling for a rise in May.

BoE Governor Mark Carney sounded a more upbeat tone than previously last week, saying wage growth was finally picking up and that the focus of the BoE is shifting back to tackling above-target inflation.

The central bank releases its inflation report on Thursday and also announces a decision by its monetary policy committee, which is expected to leave rates unchanged. (Reporting by Saikat Chatterjee, editing by Larry King)

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