Sterling set to end three-week winning run as BoE decision nears

By Niket Nishant

July 24 (Reuters) - The British pound looked set to snap a three-week winning streak on Friday, as a softer inflation reading and the deteriorating Middle East conflict prompted investors to reassess their positioning ahead of the central bank meeting next week.

Sterling was trading marginally higher on the day, at $1.3318 versus the dollar, but was set for losses of 1% for the week should current levels hold. The currency has retreated after hitting its highest since May last week.

It ticked 0.10% lower against the euro at 1.1692 euros, for its fourth consecutive session lower.

Competing forces are shaping the outlook for the pound, as rate-hike expectations clash with questions surrounding the fiscal outlook.

Traders are pricing in at least one rate hike by the Bank of England, according to data compiled by LSEG. Higher rates typically support a currency.

However, investors are still looking for clarity on new Prime Minister Andy Burnham's fiscal plans. Finance minister John Healey is seen as a safe pair of hands, but markets are still in a wait-and-see mode.

The BoE faces a difficult balancing act ahead, and next week's meeting will be under scrutiny.

Any indication that policymakers are leaning towards a prolonged pause could weigh on sterling, while a more cautious tone on inflation risks may offer the currency some support.

"The pound rally in July was overdone. Current inflation dynamics should be consistent with most MPC (Monetary Policy Committee) members remaining on hold," TD Securities economists wrote.

The deteriorating Middle East conflict has also added a layer of uncertainty. Earlier this week, data showed that inflation cooled by more than expected in June, but oil prices jumped over $100 a barrel for the first time since May this week.

"We see a relatively low likelihood that tensions in the region ease significantly enough to ease shipping, crude prices, and indeed refined products," said Benjamin Jones, global head of research at Invesco.

(Reporting by Niket Nishant in Bengaluru; Editing by Shreya Biswas)