July 18, 2014 / 8:52 AM / 6 years ago

Rate hike bets keep sterling on track for weekly gains vs euro

LONDON, July 18 (Reuters) - Sterling held steady on Friday and remained on track for a big weekly gain against the euro, as investors bet on further divergence in monetary policy between Britain and the euro zone.

Concerns about tensions between Russia and the West after a Malaysian passenger plane was shot down over eastern Ukraine and jitters about Israel’s ground offensive in Gaza, which have hit risk assets since Thursday, had little impact on the pound.

Traders expect the Bank of England to tighten monetary policy this year or early next, while the European Central Bank is set to keep policy loose and perhaps resort to asset purchases to avert the threat of disinflation in the euro zone.

The euro was flat at 79.10 pence, off a 22-month low of 78.89 pence struck on Thursday, but still on track for weekly losses of about 0.6 percent.

Against the dollar, the pound was steady at $1.7105 , retreating from an almost six-year high of $1.7192 reached on Tuesday.

“Investors are waiting for more bullish cues from the UK,” said a London-based spot trader. “Most of the good news is priced in, and if sterling has to move higher then rate hike expectations have to be brought forward.”

Sterling has surged over the past year as Britain’s economy has shown signs of a strengthening recovery, fuelling expectations that the BoE will hike interest rates before the year’s end. The currency has gained almost 15 percent against the dollar and almost 10 percent against the euro over the year.

Earlier this week, the sterling overnight index swap curve implied a chance of a rate hike in November after inflation jumped more than expected. But those expectations have been pushed back to December after data showed wage inflation was still subdued.

Investors will look for clues to the timing of any move in minutes of the Bank of England’s most recent policy meeting, which are due for release next week. Some analysts believe the July meeting could be the last at which the decision to leave interest rates unchanged at 0.5 percent is unanimous.

“Some monetary policy committee (MPC) members have signalled the decision is becoming more finely balanced,” RBC Capital said in a note. “By the time the August Inflation Report projections are presented at the next MPC meeting, news of another quarter of above-trend growth could provide the trigger for at least one vote to tighten policy.” (Reporting by Anirban Nag; Editing by Catherine Evans)

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