By Lucy Raitano
LONDON - Sterling traded higher against the U.S. dollar on Tuesday, staging a small rebound after a seven-day losing streak, but stayed close to a two-week low as traders keep their attention on Britain's floundering economy.
At 1023 GMT, the pound was 0.16% up against the dollar at $1.28460, while it ticked 0.32% higher versus the euro to 86 pence.
For Stuart Cole, chief macro economist at Equiti Capital, Tuesday's modest uptick is a sign of sterling sellers squaring off their positions until Wednesday's Federal Reserve meeting is out of the way, in case it comes with a more dovish slant which could boost the pound.
"The market has taken a more downbeat view of sterling following the CPI - and the PMI - figures, as they do not expect the BoE to hike as far as previously anticipated," Cole said.
Earlier this month, traders were placing bets on a Bank of England terminal rate close to 6.5%, but this has fallen to around 5.8%, said Cole, after Britain's high rate of inflation fell by more than expected in June.
Further compounding the downward revision of interest rate expectations is the UK's slowing economy, with a survey on Monday showing Britain's private sector growing at its slowest pace in six months in July.
According to Ipek Ozkardeskaya, senior analyst at Swissquote Bank, it has prompted traders' attention to switch to the UK economy.
Traders are putting "more weight on the damage that the rising Bank of England (BoE) rates will do to the British economy, than on the good they might do to sterling holders," wrote Ozkardeskaya in a note.
The BoE has already raised the rate 13 times since late 2021 from 0.1% to try to calm inflation.
Traders are predicting a 60% chance of a 25 bps hike from the BoE at its next meeting on August 3, and a 40% chance of a larger 50 bps hike.
"If anything, the moves have simply exposed the truth that the sterling strength we had been seeing was nothing more than an interest rate play as opposed to anything more structural," said Equiti's Cole.