Sterling pulls back from two-month highs vs dollar

By Patrick Graham

LONDON, April 10 (Reuters) - Sterling retreated from close to 2014 highs on Thursday after reaching its highest in almost two months against the dollar, helped by a weakening of the U.S. currency this week which surprised many in global markets.

Nothing was expected from a Bank of England policy decision later in the day (1100 GMT), with the British central bank expected to keep interest rates and its programme of quantitative easing unchanged.

A number of major banks had turned against the pound towards the end of last week, convinced that more robust jobs figures and the first signs from the U.S. Federal Reserve of higher interest rates next year were set to drive the dollar higher.

In the event, even after the European Central Bank pointed the way towards money-printing last week, the mood has turned and the resulting weakness of the dollar taken sterling back above $1.68.

But dealers and analysts say there is strong resistance to more gains the nearer the pound gets to $1.70 and, on the trade-weighted sterling index, around 86.40, a level it bounced off twice in March.

"This week's data has proved interesting and supportive for sterling, but it has chiefly been a dollar story," said Paul Robson, one of the strategists who had called for the pound to weaken at the end of last week.

"For us sterling is still a multi-month sell but it has become clear that we will need a catalyst and that probably has to come from the U.S. side."

The pound traded just over 0.1 percent lower at $1.6773 and 82.61 pence per euro respectively in morning trade in Europe.

A stronger dollar backed by a reining in of central bank stimulus was the biggest bet of many banks and investment houses at the start of this year and many were shaken out by its failure to deliver in January and February.

The pound, in turn, rose 10 percent in the second half of last year on expectations an improving economy would lead to higher domestic interest rates early in 2015.

Doubts have begun to emerge about the structure of that recovery but the International Monetary Fund sharply upgraded its forecasts for British growth on Tuesday, as did a leading domestic think-tank.

The IMF now forecasts the economy to expand at 2.9 percent in 2014 before easing to 2.5 percent next year. That was up from previous forecasts of 2.4 and 2.2 percent, respectively. Industrial output data earlier this week was also stronger than forecast, raising hopes the recovery is broadening out somewhat.

Analysts at Swedish bank SEB (Paris: FR0000121709 - news) said as London opened that the pound could well retreat after meeting resistance at $1.6823. (Editing by Catherine Evans)