Sterling struggles to hold its ground after last week's rate hike

LONDON (Reuters) -Sterling gave back early small gains against the dollar and euro on Monday as traders continued to grapple with the implications of the previous week's outsized rate hike by the Bank of England.

The pound was last flat against the dollar at $1.2712, having earlier been up as much as 0.25%. That was a small rebound after its 0.83% decline last week, its biggest weekly drop since mid May.

Sterling was also unable to hold onto its early gains against the euro, made after soft German business sentiment data. The European common currency was last up 0.28% at 85.90 pence.

Monday's moves in sterling followed the Bank of England's larger-than-expected 50 basis point interest rate hike on Thursday, which pushed market pricing for the peak in the Britain's key interest rate over 6%.

That implies further tightening of more than 100 basis points. In contrast, markets expect other major central banks to be near, if not at, their rate peaks.

Traders are trying to assess whether this should mean a stronger pound, with currencies typically benefiting from higher rates compared to peers, or whether the ramifications for economic growth in Britain mean the pound will weaken.

"Price action points to (sterling) being at an inflection point at which further rates hikes are no longer bullish for the currency," said BNP Paribas analysts in a note.

The pound however hit a fresh seven-and-a-half year high against the under-pressure Japanese yen, reaching 182.98 yen before retreating after Japan's top currency diplomat stepped up warnings against recent yen weakening.

Speeches by several BOE policy makers will be closely watched this week. Governor Andrew Bailey speaks on Wednesday on a panel with top central bankers from the European Central Bank, Federal Reserve and Bank of Japan.

(Reporting by Alun John; Editing by Barbara Lewis and Jan Harvey)