March 22, 2018 / 9:50 AM / a month ago

UPDATE 1-Sterling hits 7-week high ahead of BoE meeting; retail sales jump

* Strong retail sales come ahead of BoE decision

* Sterling enjoying best week in eight vs dollar

* Market expects BoE May rate hike

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

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Adds details, updates prices after retail sales data)

LONDON, March 22 (Reuters) - Sterling rose to a seven-week high on Thursday as retail sales beat expectations and traders prepared for a Bank of England meeting at which the central bank is expected to flag a rate rise in May.

The pound, helped by a dollar that weakened overnight following the U.S. Federal Reserve meeting, has rallied this week after the European Union and Britain agreed a Brexit transition deal and wage growth hit its fastest pace in almost 2-1/2 years.

With more clarity about Brexit talks and wages growing almost as much as inflation, the BoE looks to have its path cleared for a rate hike in May.

British retail sales volumes rose 0.8 percent in February from January, the Office for National Statistics said, above the consensus forecast in a Reuters poll of economists for a monthly rise of 0.4 percent, and after dropping 0.2 percent in January.

Sterling rose as much as 0.3 percent to $1.4179, its highest level since Feb. 2 after the data.

Against the euro the pound, trading flat before the retail sales numbers, gained 0.2 percent to briefly touch 87.040 pence per euro. That was its strongest level since Jan. 25.

Michael Hewson, chief analyst at CMC Markets, said Wednesday’s better than expected wages growth and unemployment data “shifted the calculus on a possible move on UK rates to the May meeting.”

The BoE, which is expected to keep rates on hold this month when it publishes its decision at 1200 GMT, has said before that it wants to see wages grow before it starts to hike rates to bring inflation levels back down to target.

“The odds of a more hawkish tilt at today’s Bank of England policy meeting have risen materially following what has been a relatively constructive week of Brexit developments and UK data,” said Viraj Patel, a strategist at ING.

Patel said any suggestion of two rate hikes in 2018 could push sterling above $1.42 against the dollar.

The pound in January hit its highest level, at $1.4346, since the vote to leave the EU in June 2016 before traders decided the British currency had been overbought. (Reporting by Tommy Wilkes Editing by Angus MacSwan and Keith Weir)

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