Sterling hit after U.S. numbers, month-end hurts

By Patrick Graham and Anirban Nag

LONDON, July 31 (Reuters) - Sterling sank almost 1 percent against the euro in afternoon trade on Friday, weighed down by month-end outflows and poor U.S. wage data that undermined expectations of the first rises in interest rates by major economies later this year.

Sterling has hit more than 7-year highs against the euro this month on a revival of expectations that the Bank of England was likely to follow swiftly on the U.S. Federal Reserve's heels in raising rates.

As such the pound and the dollar have tended to be correlated through a turbulent month for global markets and the euro's surge on Friday came at the expense of both.

Dealers said the U.S. data had encouraged investors to book profits on a rally that had also taken sterling it to its highest in a month against the greenback earlier this week.

"We loved that spike in the euro, a lot of people have jumped on it, against the pound as well," said a dealer with one bank in London.

Data out of Britain has been robust, with consumer demand holding up well and growth accelerating in the second quarter. Bank of England Governor Mark Carney has indicated a decision on rates will come around the turn of the year.

The Bank has said publicly that it does not have to wait for the Fed to hike rates. But many reckon that, behind closed doors, it is concerned that if it were to raise rates first, the already-strong pound would appreciate further, hurting exporters and pushing down consumer prices.

Against the broadly weaker dollar, sterling was up 0.1 percent at $1.5625, having hit a four-week high of $1.5691 on Wednesday. The euro was up by 0.9 percent at 70.70 pence while the BoE's trade-weighted sterling index was at 93.6, having hit a one-week high of 94.3 on Thursday. That was just shy of a 7-1/2-year peak of 94.5 touched earlier in the month.

"There are some month-end outflows and profit-taking which is weighing on sterling," said a London-based spot trader. "It remains a buy on dips against the euro, but some long positions are being trimmed."

Month-end flows are caused by global portfolio managers rebalancing their currency hedges on their exposure to global stocks and bond markets.

"Super Thursday" next week will see the combined release of the BoE's policy decision, inflation report and, for the first time, the minutes of the meeting published on the same day.

No interest rate change is expected, although the vote could show the first split among the nine-member MPC (KOSDAQ: 050540.KQ - news) this year. Some are expecting that up to three members will vote in favour of an immediate rate increase.

"Overall, we expect the BoE to provide a triple whammy for the bullish sterling sentiment as the minutes are likely to contain two or potentially three members voting for a rate hike," said Viraj Patel, currency strategist at ING.

"The latest inflation projections will show the 2 percent target being met earlier given the recent pickup in wages and Governor Carney is unlikely to aggressively talk down sterling strength in the press conference, conceding that it is a by-product of a stronger economy." (Editing by Alison Williams)