Sterling close to recent highs versus dollar

By Stefano Rebaudo

(Reuters) - The pound was flat against the dollar on Friday but still within striking distance of an almost six-month high as investors await major central bank policy meetings next week, including the Bank of England (BoE).

Economists expect the BoE to add another 50 basis points to Bank Rate next week, despite the economy falling into recession.

Still, they see the BoE as the most dovish in developed countries as it pushed back against market pricing for hikes at its last meeting in November.

"We don't expect any major moves in the next few days as next central banks’ policy meetings are very difficult to call," said Matthew Ryan, Head of Market Strategy at global financial services firm Ebury.

"In the longer term, we are positive on the pound as the market is currently pricing the worst-case scenario for the British economy, which we think is slightly overdone," he added.

The pound was flat versus the dollar at $1.2246. It touched on Monday its highest level since mid-June at $1.2345.

It rose 0.1% against the euro to 86.15 pence after hitting a three-month high against the single currency earlier in December.

The British public's expectations for inflation over the medium term edged up last month - a source of concern for many BoE policymakers - although expectations for the year ahead dipped, a quarterly central bank survey showed on Friday.

"A bottoming out in global growth dynamics compared to excessively pessimistic expectations, as well as a peak in global interest rates on the back of softening inflation pressure, could both allow the EUR and GBP to make gains versus the USD," HSBC said in a research note.

However, several analysts -- including JP Morgan, which sees an 11% drop in the pound against the dollar in 2023 -- have a more pessimistic view as they forecast a weak economic outlook will continue to weigh on the British currency.

Sterling rose from the end of September while the yield spread between gilts and Bunds tightened as the Bank of England stepped in to avoid a financial meltdown after Finance minister Kwasi Kwarteng set plans for unfunded tax cuts and more government borrowing.

At the end of October, new British Prime Minister Rishi Sunak's and Chancellor Jeremy Hunt's plans to restore confidence further calmed the markets.

ING analysts recently argued that a so-called "fiscal rectitude rally" has run its course and a further appreciation of the pound is now unlikely.

Graphic: GBPyspread https://fingfx.thomsonreuters.com/gfx/mkt/byvrlljllve/Pasted%20image%201670579631660.png

(Reporting by Stefano Rebaudo, editing by Kim Coghill)