UPDATE 1-Sterling at 1-week high as BoE rate hike bets rise

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LONDON, Sept 10 (Reuters) – Sterling was at a one-week high against the dollar on Friday, shrugging off Britain’s weak economic data on expectations that the Bank of England was set to hike interest rates well ahead of its U.S. counterpart.

The currency extended gains to a second session against a softer greenback, rising 0.4% to $1.3886, but fell short of touching the one-month peak of $1.389 hit last week after U.S. payrolls.

The pound was also set for a third straight weekly gain, its longest streak since the one ending on May 28.

The BoE is expected to raise borrowing costs by end-2022 or even earlier if inflation remains high and economic recovery from the pandemic continues, a Reuters poll showed.

That comes after Governor Andrew Bailey said on Wednesday that half the bank’s board members deemed conditions were right to start considering rate rises.

“Those two positive developments are helping to lift cable back towards the 1.40 level,” said Lee Hardman, currency analyst at MUFG Bank, adding that a rate hike in the first-half of 2022 could not be ruled out.

The probability of a 15 basis point hike to 0.35% in February had risen to 53%, while the Federal Reserve is forecast not to raise rates until at least 2023.

However, for the pound to break above $1.40, a level last reached in June, economic data needs to hold up over the next two months and BoE hawkishness to build further, Hardman added.

Sterling is among the best performing currencies this year, helped by prospects that the country’s speedy vaccination programme would lead to a faster economic reopening and rebound.

However, the British economy began the third quarter on the back foot, expanding by just 0.1% in July due to self-isolation rules, but early signs in August have pointed to a surge in consumer spending.

Dean Turner, economist at UBS Global Wealth Management said the July release was unlikely to dent the BoE’s hawkish mood.

“So we continue to expect an interest rate hike in the first half of next year. This should continue to support the pound against its peers.”

Against the euro, sterling traded at a three-week high of 85.25 pence, and was also set for as many week of gains .

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