May 11, 2018 / 3:17 PM / 17 days ago

Sterling bounces from four-month lows to end tricky week higher

LONDON (Reuters) - Sterling bounced on Friday as a weak dollar helped the pound recover losses suffered when the Bank of England held rates and cut its economic growth projections.

FILE PHOTO: British Pound Sterling banknotes are seen in a box at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017.REUTERS/Leonhard Foeger

The BoE held interest rates steady as expected on Thursday but cut its growth and inflation projections for this year and next.

The decision saw sterling fall close to a four-month low against the dollar and left traders sceptical about whether the central bank will hike rates at all this year.

Markets a month ago had foreseen a 90 percent chance of a May rate hike but those expectation were dashed by weaker-than-expected data.

“Looking ahead, I can see potential for volatility on the interest rate front as opinions on the next hike are divided now,” said London-based FX strategist Jane Foley at Rabobank.

“We know the Bank of England will be very dependent on data and we’re likely to see more Brexit news in months ahead,” Foley said.

The pound had rallied in 2018 on the back of optimism that Britain could secure itself a transition deal for when it leaves the European Union next year.

But bad weather earlier in the year, which hurt economic momentum, and a bounce in the dollar have reversed sterling’s run higher.

The British currency tumbled to $1.35 in recent weeks from its post-Brexit vote highs of close to $1.44.

At GMT 1700 the pound was up 0.3 percent at $1.3554 and had increased 0.1 percent against the euro to 88.11 pence.

Friday’s rise leaves the pound on track for a small weekly rise after three consecutive weeks of falling.

BoE Governor Mark Carney told BBC television on Thursday that interest rates were likely to rise by the end of this year.

Analysts remain wary, though.

“Our view is that inflation will continue to fall over the reminder of this year and eventually end the year below the two percent target, which will close the door for a rate hike,” said Felix Ewert, forex analyst at SEB.

Other analysts said that doubts over the BoE’s message would fade if data in the next months showed the British economy gaining momentum.

“We fully expect the current scepticism of the BoE’s guidance to ebb away, which will provide increased support for the pound as we advance towards the next key policy meeting on 2nd August,” said Lee Hardman, FX strategist at MUFG.

Editing by William Maclean

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