July 26, 2018 / 8:34 AM / 22 days ago

Sterling weakens despite BoE rate hike prospects

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

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

LONDON, July 26 (Reuters) - The pound struggled to gain ground against the dollar and the euro on Thursday due to mounting uncertainty over Brexit even as investors strengthened bets on a Bank of England interest rate hike next week.

With just over eight months left until Britain is due to leave the European Union, there is little clarity about how trade will flow as Prime Minister Theresa May tries to strike a deal with the bloc.

May on Thursday sought to reassure the public about government plans to stockpile medicines and blood products ahead of a possible no-deal Brexit. The pound has been vulnerable to Brexit’s to and fro in recent weeks, gaining on hopes May will secure a trade deal that keeps Britain close to Europe and falling on worries the talks will collapse and leave the country isolated.

Rising expectations of a Bank of England interest rate rise - the market is currently pricing in an 81 percent chance of a 25 basis point increase at next week’s monetary policy meeting - have also helped the currency off 10-month lows hit last week.

But if the BoE does not hike its key rate next Thursday “that would be a negative signal for sterling in view of current market expectations and as a result the currency would go into free fall,” Antje Praefcke, an analyst at Commerzbank, wrote in a note to clients.

The pound rose to as high as $1.3213 against a broadly weaker dollar, its strongest level since July 17, but gave up gains and fell into the red. It was trading down 0.1 percent at $1.3180 at 0825 GMT.

Sterling, which has been much less volatile against the euro, was virtually unchanged versus the single currency at 88.91 pence. (Reporting by Tom Finn; Editing by Angus MacSwan)

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