Market News

By Stefano Rebaudo

(Reuters) -Sterling rose against a weakening dollar on Thursday with the markets watching whether the Bank of England will maintain its “gradual and careful” language on the pace of policy easing at its meeting due later in the day.

That slow and steady path no longer looks so clear, with inflation above the BoE's projections and forecast by some economists to reach 4%, double the bank's target, in the coming months.

Markets expect a 25-basis point rate cut, while pricing a total of 86 bps of rate cuts by December 2026. "Recent Monetary Policy Committee (MPC)-speak has leaned dovish, although it has been light," said Jamie Searle, rate strategist at Citi. "The tail risk is that this MPC has shown in recent years that it isn’t afraid to surprise."

The pound was up 0.18% versus the dollar at $1.3380, its highest since July 30..

“Our view remains that the UK economy is likely to grow around 1-1.2% for the next three years, versus Office for Budget Responsibility (OBR) forecasts of 1.7-1.9%,” said Mohit Kumar, economist at Jefferies.

“Lower growth implies that the BoE would need to do more than currently priced in (in terms of rate cuts), and the fiscal picture is worse than (what) the current official estimates show,” he said.

Finance Minister Rachel Reeves is expected to raise taxes again in a budget statement towards the end of 2025 in order to meet her own targets for fixing the public finances.

A survey showed on Wednesday that activity in Britain's construction sector fell by the most in more than five years.

The single currency rose 0.15% at 87.42 pence per euro, its highest since July 28. It hit last week 87.69, its highest level since May 2023 as the European Central Bank is almost done with its monetary easing cycle.

The euro hit a fresh 1-1/2-week high against a weakening dollar on Thursday as investors monitored Ukraine peace talks.

“While we are bracing for a 7-2 split vote, we would not be overly surprised if (Swati) Dhingra and/or (Alan) Taylor voted for a 50-bp cut, as they did in May,” said Matthew Ryan, head of market strategy at global financial services firm Ebury, adding that such a move would likely trigger a sell-off in the pound.

(Reporting by Stefano Rebaudo, editing by Harikrishnan Nair)