By Amanda Cooper
LONDON (Reuters) - The pound eased on Wednesday, surrendering some gains from its biggest one-day rally in four months the previous day, after a softer reading of monthly U.S. business activity battered the dollar.
Sterling was down 0.1% at $1.2435, having risen 0.8% on Tuesday, the most in one day since mid-December. The euro was steady against the pound at 85.99 pence.
The pound has come under pressure this week, having hit its lowest since November on Monday, after Bank of England officials suggested the central bank was becoming more confident that UK inflation is subsiding, which would indicate that interest rates might fall more quickly than the market currently expects.
BoE Governor Andrew Bailey last week said inflation in Britain was subsiding in line with the central bank's forecasts, while Monetary Policy Committee member Dave Ramsden, who has recently voted to keep rates where they are, said the risk of price pressures remaining too high has receded.
The derivatives market reflects a belief among traders that the BoE could cut rates once at its August meeting and again by the end of the year.
Markets show traders believe there is about a 40% chance of a June cut, something roughly half the economists surveyed by Reuters for a poll published on Wednesday expect.
"While we would argue that prospect remains plausible it is also clear that the MPC remains divided and that reaching the required majority to cut rates will be difficult over the coming months," MUFG currency strategist Derek Halpenny said.
"In that sense, a June rate cut is a close call and lots will have to go favourably from an inflation perspective to get a cut by then," he added.
BoE chief economist Huw Pill on Tuesday expressed caution about the prospect of early rate cuts and the date of the first one probably remains "some way off", he said in a speech.
Highlighting how tricky the situation is, a survey of purchasing manufacturers on Tuesday showed business activity in Britain picked up at its fastest pace in nearly a year, although an index of input prices hit its highest since last May.
Wage growth is another area of focus for the BoE.
An industry survey on Wednesday showed British employers reached median basic settlements with staff in the three months to the end of March that were 4.8% higher than a year earlier, although down from February's 5% rate.
Before they cut interest rates, most BoE policymakers want to see signs that annual wage growth is heading back to the 3-4% range from the most recent rate of 6%.