Sterling hits seven-week high ahead of BoE

Sterling climbed above $1.27 for the first time in seven weeks on Thursday, as investors awaited a Bank of England quarterly report that is expected to upgrade its growth and inflation forecasts. A survey showed Britain's construction sector grew last month at the weakest rate since August against a backdrop of rocketing costs linked to last year's vote to leave the European Union, but this had little effect on sterling, with the main focus on the BoE.
The central bank, which will publish its report at 1200, to be followed at 1230 by a press conference with Governor Mark Carney, will probably try to avoid adding to speculation about a first interest rate hike in nearly a decade, even as it acknowledges the economy's resilience since the Brexit vote.
With Britain having outpaced the world's other big rich economies last year, the BoE is expected to raise its 2017 growth forecast for the second time in three months, according to a Reuters poll of economists.
Inflation is already set to overshoot the Bank's 2 percent target in the coming months, having been boosted by a more than 10 percent fall in sterling since the EU referendum.
But while financial markets are pricing in a roughly 50-50 chance of a rate hike by the BoE this year, most economists say it probably will not happen until mid-2019, once Britain has wrapped up its Brexit negotiations and left the EU.
"We don't see a hike... The story the Bank of England has stuck to has been that inflation is going to be driven by the supply side, not the demand side," said HSBC currency strategist Dominic Bunning.
"You've got higher input costs, higher commodity prices, higher costs from sterling, (but) that isn't a sustainable demand-driven inflation, wage-driven inflation story that the Bank of England can curb."
Sterling climbed to as high as $1.2706 in early morning trading in Europe to hit $1.2706, its strongest since Dec. 14., before slipping back to $1.2671 by 1025 GMT, still up 0.1 percent on the day.
Against a broadly stronger euro, the pound slipped 0.3 percent to 85.41 pence.
Most traders and analysts say the main driver for the currency will continue to be the way in which Britain exits the EU. Prime Minister Theresa May's Brexit plan easily cleared its first legislative hurdle on Wednesday, paving the way for the government to launch divorce talks by the end of March.
On Thursday the government will publish its Brexit "White Paper", setting out its plans for leaving the bloc.
"(The government) is likely to underline once again that it is prepared to relinquish access to the EU single market.
What is decisive for the BoE and GBP investors is how the government plans to cushion the related negative real economic effects," wrote Commerzbank strategists in a research note.