By Samuel Indyk
LONDON (Reuters) - The British pound rose against the euro but was flat against the U.S. dollar on Friday, a day after the Bank of England increased its interest rate for the third consecutive meeting but softened its language over future tightening plans.
Against a weakening euro, the pound rose 0.5% to 83.88 pence but was still heading for its second consecutive weekly loss versus the single currency.
Sterling was little changed against the dollar at $1.3147 but was still on track for its first positive week in four and its best weekly performance for six weeks.
The Bank of England followed the U.S. Federal Reserve in raising rates this week but analysts at Bank of America (NYSE:BAC) think the focus may now turn back to geopolitical developments.
"With three major central bank decisions now behind us, the market is likely to revert to trading headline risk and geopolitics," Bank of America said.
A fourth straight day of talks between Russian and Ukrainian negotiators took place on Thursday, but the Kremlin on Friday accused Kyiv of trying to drag out discussions.
Looking further out, Bank of America thinks the differing messages from the BoE and Fed will fail to provide support for the pound.
"The contrast in tone between the Fed and Bank of England could not be starker and goes to the heart of why we think that UK rate hikes will not provide a boost to GBP," Bank of America said.
Money markets are pricing in another 116 basis points of tightening from the BoE and 162 basis point of tightening from the Fed by the end of the year.
Analysts at Scotiabank also expect the pound to remain on the back foot as further rate hike bets are taken out.
"Steep inflation that may reach double digits in autumn may motivate markets to maintain some of these bets, but a cost-of-living crisis that depresses growth and employment will keep the BoE from hiking excessively," Scotiabank analysts said.
"So we foresee more downside in the pound toward 1.30," the bank added.