Sterling extends rally on firm rate-hike bets, subdued dollar

By Niket Nishant

Aug 21 (Reuters) - The British pound was on track for its fourth consecutive weekly gain on Friday, helped by a feeble dollar and recent economic momentum that has kept rate-hike bets alive.

Sterling was last up 0.19% to $1.3658, hovering near its highest since February. Against the euro, the British currency was flat at 85.66 pence.

A disconnect between economists' expectations and market pricing has complicated the outlook for sterling. Economists polled by Reuters expect the central bank to keep borrowing costs unchanged this year, while traders are still pricing in at least one increase in 2026, according to data compiled by LSEG.

The mismatch could put the pound's gains to the test, even as some investors point to recent inflation and GDP data as evidence that the BoE may need to raise rates, a move that would typically support the currency.

"I think that inflation running relatively too high for comfort gives the BoE some room for hikes this year. And then there's a reasonably strong chance for additional hikes through 2027 if, in fact, inflation doesn't come down," said Brock Weimer, analyst, investment strategy at Edward Jones.

The pound was also helped by weakness in the dollar, which fell on concerns that the U.S. Treasury's efforts to calm the bond markets might end up undermining confidence in the currency.

Separately, British retail sales in July fell as expected after a surge in June, according to official figures released on Friday.

Another set of data also showed that Britain's government recorded an unexpected budget deficit last month.

(Reporting by Niket Nishant in Bengaluru; Editing by Alex Richardson)