(Updates prices, adds dollar move and UK-France dispute update) LONDON, Oct 29(Reuters) - Sterling dropped against a stronger dollar on Friday but recovered some of the previous session’s losses against the euro and was set for a small weekly gain as market attention focused on the possibility of a Bank of England rate hike next week. The dollar was up around 0.9%, jumping as government bonds rose and traders saw new inflation reports as challenging major central banks to pull back on asset purchases more quickly than planned. The dollar’s strength saw cable, which had been steady for much of Friday’s European session, drop to a two-week low. The pound was down 0.8% on the day at $1.36835 at 1600 GMT and set for a weekly fall of 0.5%. But versus the euro, the pound was up around 0.4% at 84.405 pence per euro and set for a 0.3% weekly rise. The pound had fallen against the euro in the previous session after the European Central Bank meeting kept investors expecting a rate hike in 2022 and did not calm their fears about surging inflation, leading to a jump in euro zone bond yields and a stronger euro. The pound’s moves this week have been driven by speculation over whether the Bank of England will hike rates at its meeting on Nov. 4, or whether concerns about the possible longer-term hit to economic growth stemming from supply chain disruptions and Brexit will cause the bank to hold back. Britain threatened to open trade dispute proceedings against France if Paris imposes sanctions on London in a rapidly deteriorating stand-off over post-Brexit fishing rights. Markets were pricing in a 62% chance of a hike at next week’s meeting, up from a 56% chance in the previous session, according to data from CME. “Our suspicion is that the pound should find some support as we approach Thursday’s BoE meeting, and with a lot of positives in the price for the EUR, the 0.8500 resistance should hold for now,” wrote ING FX strategists in a note to clients. Deutsche Bank strategists said in a client note on Friday that they had changed their view and now expect the BoE to deliver its first post-pandemic rate hike at next week’s meeting. “Ultimately, we think a weaker supply outlook combined with surging and stickier inflation will provide the majority of the MPC (Monetary Policy Committee) enough ammunition to pull the trigger on a first rate move,” Deutsche Bank said. The British public’s expectations for inflation over the next year jumped to the highest since 2008 this month, Citi said earlier this week, based on its monthly survey with pollsters YouGov. A weekly auction of British government six-month Treasury bills - a form of short-term debt - saw the highest yield since April 2020. Reporting by Elizabeth Howcroft Editing by Susan Fenton and Mark Potter