May 21, 2018 / 10:31 AM / a month ago

UPDATE 2-Sterling slumps to near five-month low as dollar surges

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Adds context, updates figures)

LONDON, May 21 (Reuters) - Sterling slumped to its lowest since December on Monday as the dollar surged and investors prepared for data this week that could determine whether the Bank of England raises interest rates in 2018.

A broad rally by the dollar and dwindling expectations that interest rates will rise have caused what had been one of the best-performing major currencies to give up all its 2018 gains.

Sterling slumped half a percent on Monday and fell below $1.34 for the first time since December, before trimming some of its losses.

The currency was headed for its biggest daily loss in three weeks as the dollar rose broadly on reports that the United States was putting its trade war with China "on hold". tmsnrt.rs/2egbfVh

The pound also fell versus the euro, sliding 0.2 percent to 87.64 pence.

Important data on the British economy is due out this week including inflation on Wednesday and gross domestic product on Friday.

The figures will be scrutinised by investors to gauge whether the BoE might tighten monetary policy as early as August.

“Markets have lost faith and conviction over BoE policy tightening, we now place a strong emphasis on UK data to guide market policy expectations,” said ING FX analyst Viraj Patel. “Buckle up, it’s going to be a bumpy ride for the pound this week.”

Risks around the sort of post-divorce relationship Britain can agree with the EU weighed heavily on the pound last week. But the biggest reason for sterling’s fall has been a drastic shift in market expectations of when the BoE will raise rates.

Recent weak economic data mean markets are now not even pricing in a full 25-basis-point hike by the end of 2018. They had expected two 25 bp rises this year.

Concerns over Brexit also continue to dog the pound. tmsnrt.rs/2hwV9Hv

Scottish First Minister Nicola Sturgeon said on Sunday she would consider another vote on independence for Scotland when the British government offers some certainty over Brexit.

Adding to the political uncertainty, lawmakers from Prime Minister Theresa May’s governing Conservative Party reportedly are bracing themselves for a snap autumn parliamentary election amid fears that the Brexit deadlock will become insurmountable.

Analysts at CMC Markets and Commerzbank, in notes to clients, predicted the pound would fall toward the $1.3300 level in the short term.

But Stephen Gallo, European head of FX strategy at BMO Financial Group, said that forthcoming data would show “underlying strength in Britain’s economy and the pound would rebound to $1.38 in the next three months.”

Reporting by Tom Finn, editing by Gareth Jones, William Maclean

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