By Samuel Indyk
LONDON (Reuters) - The pound declined against the dollar and euro on Thursday, a day after data showed a contraction in British activity in August, prompting markets to trim expectations for further rate hikes from the Bank of England.
Sterling was last at $1.2671, down 0.5% on the day.
Wednesday's soft activity data, which also showed the slowest growth in output prices since February 2021, had traders betting that the BoE will not need to raise rates as high as previously thought to bring inflation back down to target.
The central bank has so far raised interest rates 14 times since December 2021, taking them to a 15-year high of 5.25%.
Money market traders still expected the BoE to raise its interest rate to 5.5% next month, but futures now price just a one-in-three chance that rates will hit 6% compared with an over 50% chance seen before yesterday's activity data.
"What the data showed yesterday is that the UK is not isolated to the global growth slowdown," said Simon Harvey, head of foreign exchange (FX) analysis at Monex Europe.
"Markets are readjusting to the lower growth profile, taking some of the bets off the table for the Bank of England's tightening cycle and that's filtering through," Harvey added.
A Reuters poll meanwhile narrowly found that economists expect the BoE's interest rate to peak at 5.50%, down from 5.75% predicted in July.
The pound also slipped 0.3% against the euro with the single currency last buying 85.63 pence.
ING's global head of markets and regional head of research for UK & Central and Eastern Europe Chris Turner expects the euro to gain further against the pound this year, with the BoE close to the end of its rate hike cycle.
"We still think that the BoE will not deliver on the 60 bp of tightening still priced by the markets," Turner said, "and that EUR/GBP (euro-sterling) can later this year move back to the 0.87 area."
Traders were now turning their eyes to the Federal Reserve's three-day Jackson Hole Symposium which begins today. BoE deputy governor Ben Broadbent could give more clues about the future path of monetary policy when he is scheduled to speak on Saturday.