By Joice Alves
LONDON (Reuters) -Sterling dipped on Wednesday after British inflation unexpectedly held steady at 4.0% in January, defying forecasts of a rise, and fuelling bets the Bank of England (BoE) may cut interest rates in June.
Economists polled by Reuters had forecast an increase to 4.2%.
Interest rate futures are now pricing in a roughly 50% chance that the BoE will cut Bank Rate to 5.0% from its a 16 year-high of 5.25% in June, according to LSE Group data.
On Tuesday, investors were putting only a 40% chance on a June rate cut after the release of stronger-than-expected U.S. inflation data.
Money markets also see a 75% chance of a BoE rate cut in August and are pricing in just 65 basis points of easing this year. In contrast, traders see 91 bps of cuts from the Federal Reserve in 2024.
The pound fell 0.2% to $1.2564, after briefly touching a eight-day low against the dollar.
Against the euro, sterling was down 0.23% at 85.25 pence, after touching a fresh six-month high before the release of the UK inflation data.
"Today CPI numbers for January came in somewhat below expectations. This resulted in some weakness of sterling," said Georgette Boele, ABN Amro senior FX strategist.
But as ABN Amro expects only a total of 50 bps of rate cuts from BoE this year, below market expectations, she sees sterling rising versus the dollar and euro.
The bank's new year-end forecasts is for cable - the pound/dollar exchange rate - to hit $1.30, versus $1.26 previously expected.
The inflation data offered some relief to Prime Minister Rishi Sunak too ahead of a national election expected this year.
Over the past couple of years, high inflation has impacted British people's living standards, contributing to the electoral challenge facing Sunak's Conservative Party, which is lagging far behind the opposition Labour Party in opinion polls.
The inflation number came just one day after data showed British pay grew at the weakest pace in more than a year at the end of 2023, in a slowdown that was probably not significant enough to spur the BoE into quicker action towards cutting interest rates.
The unemployment rate fell to 3.8%, below expectations of a decline to 4.0%.
Investec's chief economist Philip Shaw said he expects the BoE to wait for more employment data and signs that pay growth is subsiding.
"At this point in time, we see no need to change our base case, which is that the MPC (Monetary Policy Committee) will cut rates three times by a total of 75 bps this year, beginning in June," he said.