(Updates prices, adds dollar move and UK-France dispute update)
By Elizabeth Howcroft
LONDON, Oct 29(Reuters) - Sterling dropped against a
stronger dollar on Friday but recovered some of the previous
session's losses against the euro and was set for a small weekly
gain as market attention focused on the possibility of a Bank of
England rate hike next week.
The dollar was up around 0.9%, jumping as government bonds
rose and traders saw new inflation reports as challenging major
central banks to pull back on asset purchases more quickly than
planned.
The dollar's strength saw cable, which had been steady for
much of Friday's European session, drop to a two-week low. The
pound was down 0.8% on the day at $1.36835 at 1600 GMT
and set for a weekly fall of 0.5%.
But versus the euro, the pound was up around 0.4% at 84.405
pence per euro and set for a 0.3% weekly rise.
The pound had fallen against the euro in the previous
session after the European Central Bank meeting kept investors
expecting a rate hike in 2022 and did not calm their fears about
surging inflation, leading to a jump in euro zone bond yields
and a stronger euro.
The pound's moves this week have been driven by speculation
over whether the Bank of England will hike rates at its meeting
on Nov. 4, or whether concerns about the possible longer-term
hit to economic growth stemming from supply chain disruptions
and Brexit will cause the bank to hold back.
Britain threatened to open trade dispute proceedings against
France if Paris imposes sanctions on London in a rapidly
deteriorating stand-off over post-Brexit fishing rights.
Markets were pricing in a 62% chance of a hike at next
week's meeting, up from a 56% chance in the previous session,
according to data from CME.
"Our suspicion is that the pound should find some support as
we approach Thursday’s BoE meeting, and with a lot of positives
in the price for the EUR, the 0.8500 resistance should hold for
now," wrote ING FX strategists in a note to clients.
Deutsche Bank strategists said in a client note on Friday
that they had changed their view and now expect the BoE to
deliver its first post-pandemic rate hike at next week's
meeting.
"Ultimately, we think a weaker supply outlook combined with
surging and stickier inflation will provide the majority of the
MPC (Monetary Policy Committee) enough ammunition to pull the
trigger on a first rate move," Deutsche Bank said.
The British public's expectations for inflation over the
next year jumped to the highest since 2008 this month, Citi said
earlier this week, based on its monthly survey with pollsters
YouGov.
A weekly auction of British government six-month Treasury
bills - a form of short-term debt - saw the highest yield since
April 2020.
(Reporting by Elizabeth Howcroft
Editing by Susan Fenton and Mark Potter)