Britain's major rail strike caps sterling rally

By Joice Alves

LONDON (Reuters) -The pound rose against a weakening dollar but fell versus the euro on Tuesday, with an equity rally helping risk-sensitive sterling while Britain's biggest rail strike in decades added to growth concerns.

After a three-week losing streak versus the dollar, the British pound rose 0.3% against a weakening greenback to $1.2282, moving away from a March 2020 low of $1.1934 touched last week.

Against the euro, sterling fell 0.2% to 85.99 pence, after touching a 13-month low of 87.21 pence versus the single currency last week.

Supporting sterling, London's FTSE 100 index climbed on Tuesday, as a rally in crude prices saw energy stocks surge.

"Equity are grinding higher helping those that are risk correlated such as sterling," Jeremy Stretch, head of G10 FX strategy at CIBC.

But Britain's biggest rail strike in 30 years added pressure to the government to do more to help Britons facing the toughest economic hit in decades.

"We continue to see sterling as vulnerable to the UK's weak growth outlook," said Jane Foley, Head of FX Strategy at Rabobank London. The risk of "a summer of strike action will only serve to underpin fears of low investment and low productivity in the UK", she added.

Investors will be watching a series of data this week, including inflation on Wednesday, for clues on the Bank of England monetary policy plans.

The BoE raised its benchmark interest rate by a quarter point to 1.25% on June 16 and said it was ready to act "forcefully" if needed to stamp out dangers posed by inflation.

BoE chief economist Huw Pill said the central bank would need to raise interest rates further in the near future to fight surging inflation.

A day earlier, BoE Monetary Policy Committee member Catherine Mann, who voted unsuccessfully for a half-point increase in interest rates last week, called for faster rate hikes because the pound's weakness was adding to inflation pressures in Britain.

Markets are pricing in 183 basis points worth of BoE interest rates hikes by December.

"Ongoing price pressures are set to underpin a summer of potential strikes and general malaise and discontent. This suggests maintaining a bias to sell into any risk-inspired sterling gains," Stretch said.

(Reporting by Joice Alves;Editing by Alison Williams and Alex Richardson)