Pound dips as focus stays on interest rates

LONDON, Sept 21 (Reuters) - The pound fell slightly on Monday and remained around seven-week lows as traders focused on energy prices and the outlook for central bank interest rates.

Sterling fell 0.1% to $1.338. It was also down slightly against the euro, with the single currency up 0.1% at 85.78 pence.

The pound fell sharply last Wednesday as the dollar rallied after the U.S. Federal Reserve hiked interest rates and signalled it could raise them again.

The Bank of England, by contrast, held rates steady on Thursday, although it also said it may need to hike if the months-long Iran war continues to drag on and choke global energy supplies.

Higher interest rates tend to make investments such as bonds more attractive, boosting the currency.

The latest purchasing managers' index readings for September - a measure of the health of the private sector - should give currency traders more information on the UK economy this week.

Figures last week showed retail sales came in stronger than expected in August, after data the previous week showed British growth far outstripped expectations in July.

Markets will also keep closely watching oil prices, which slid to their lowest in 11 days on Monday as investors hoped for diplomatic progress on Iran at this week's UN meeting, and a partial recovery in shipments from Saudi Arabia.

Traders in money markets were last pricing in a 65% chance of a Bank of England rate hike in November, little changed from late last week. Markets expect four 25-basis-point increases by the end of next year.

(Reporting by Harry Robertson; Editing by Kevin Liffey)