Sterling edges down, but still close to recent highs vs dollar

By Stefano Rebaudo

(Reuters) - Sterling edged lower on Friday but was not far from its highest level in over seven months against the dollar.

Investors expect the British economy's slowdown to end the Bank of England (BoE) tightening cycle soon, in a move which might weaken the pound in the short-term.

British private-sector economic activity fell at its fastest rate in two years in January, a survey showed on Tuesday.

Some analysts flagged substantial short-sterling positioning on expectations for a turn in the BoE cycle.

The BoE looks on course to raise its main interest rate by half a percentage point to 4% on Feb. 2, but economists will be looking for signals that this 10th consecutive rate rise will be one of the BoE's last.

Sterling was down 0.25% versus the greenback at $1.238. It hit its highest since June 10 at $1.2447 on Jan. 23.

The U.S. dollar index was roughly stable, with traders bracing for a critical week when the central banks responsible for the greenback, the pound and the euro will meet.

The pound was down 0.2% against the euro at 87.95 pence per euro.

However, some analysts are bullish on sterling in the medium term as, they said, markets already priced in the worst-case scenario for the British economy.

"We may have reached or are close to reaching 'peak pessimism' in regard to the UK, and that GBP could see better times ahead," said Derek Halpenny, head of research global markets at MUFG.

"Fiscal credibility has improved, and in circumstances of declining global inflation and better market conditions that would come with that, external financing concerns would diminish," he added.

British finance minister Jeremy Hunt promised on Friday to tackle the country's weak productivity with post-Brexit reforms to boost growth.

Markets are also watching talks around the so-called Northern Ireland Protocol, which might help brighten the mood over the pound.

Analysts said that better relations could help establish greater trust and open up scope for flexibility in other areas to remove trade barriers with the EU and improve what some market participants see as a hard Brexit deal.

It's not clear if Britain and the European Union can reach a deal on tweaking post-Brexit trade rules for Northern Ireland in time for the mid-April anniversary of the region's 1998 peace deal, Irish Prime Minister Leo Varadkar said on Wednesday.

(Reporting by Stefano Rebaudo, editing by Frank Jack Daniel)