Sterling edged slightly higher against the dollar on Tuesday and strengthened against the euro, as traders awaited Thursday's Bank of England policy decision, widely expected to include an interest rate cut. Markets are pricing in a more than 90 per cent chance that the BoE will lower its key interest rate from 4.25 per cent to 4.0 per cent, despite UK inflation nearing twice the central bank's 2 per cent target in June. A further rate cut is also anticipated before the end of the year. The pound was last up 0.05 per cent at $1.3290 against the dollar and gained 0.3 per cent to 86.85 pence per euro. Last week, it fell to 87.69 pence—its weakest level against the single currency since May 2023. "Given the stagflationary character of the data, we expect 'gradual and careful' to stay as the main forward guidance," Citi analysts said, adding that further fiscal tightening could pave the way for continued rate cuts after the autumn budget. Borrowing figures added to the policy uncertainty. Britain's public sector borrowing exceeded forecasts in June, fuelling speculation that Chancellor Rachel Reeves may be forced to announce tax hikes later this year. Ebury chief economist Enrique Diaz-Alvarez warned that any shift away from the BoE's cautious tone "would almost certainly be greeted by a bout of pound weakness." Yields on UK government bonds rebounded after five consecutive sessions of declines. The 10-year gilt yield rose 2.5 basis points to 4.53 per cent. "The risks are two-sided," noted Nikolay Markov, economist at Pictet Asset Management. "A faster loosening of the labour market could warrant deeper cuts, whereas sticky services inflation could delay the easing cycle." Attribution: Amwal Al Ghad English Subediting: Y.Yasser
