Sterling hovers near six-month high underpinned by BoE rate hike expectations

By Johann M Cherian

Aug 25 (Reuters) - The pound held its ground near a six-month high versus the dollar on Tuesday, underpinned by expectations for interest rate hikes by the Bank of England this year, against the backdrop of concerns around sticky inflation and soaring government debt.

Sterling was last at $1.3632, while the euro last bought 85.54 pence.

The pound has had a strong run over the past four weeks on expectations that better-than-expected economic data through the first half of the year could prompt the Bank of England to raise interest rates by at least 25 basis points this year, LSEG-compiled data showed.

However, most analysts and economists see no change in interest rates, raising the risk of a decline in the currency towards the end of the year.

Francesco Pesole, an FX strategist at ING said, because they thought the BoE would tighten less than current market expectations, they anticipated the euro to gain on the pound.

"We still expect no hikes and a move to £0.870 in the coming months," he said.

A drop to 87 pence could mean an at least 2% drop from Tuesday's trading levels.

Global currency markets were broadly steady as markets absorbed the latest set of U.S. sanctions on Iran, which excluded China or any of the country's entities that if targeted, investors feared, could potentially spark a retaliation from Beijing.

Soaring government debt has also been in focus this month after the U.S. Treasury announced plans to increase its buybacks of longer-dated government bonds to cushion the surge in yields.

UK Gilt yields are among the highest among developed economies and the next test for maturities and the pound will be the Andy Burnham government's budget, expected in October.

On Tuesday, Britain set out plans to spend £10 billion ($13.6 billion) on lower-cost housing for renters with a focus on London.

Investors will be watching to see if the government plans to fund its fiscal policies through more borrowing or tax hikes, as Burnham has also previously announced policies aimed at reducing costs for households.

(Reporting by Johann M Cherian in Bengaluru)