LONDON (Reuters) - Sterling edged up against the dollar and euro on Friday, as traders looked ahead to a Bank of England policy meeting next week that will likely set the tone for the currency in the coming weeks.
The Bank of England (BoE) is expected to hold interest rates at 5.25% on Feb. 1, but any guidance on the timing of rate cuts will be watched closely.
Sterling was last up 0.2% against the dollar at $1.27295. The euro was down 0.1% to 85.31 pence.
Britain's economy started 2024 on a stronger footing, according to a survey of businesses published on Wednesday, prompting investors to reduce their bets on the BoE moving quickly to cut interest rates.
Money markets are currently pricing a 42% chance of a cut in May, while June is given a 74% chance.
"Despite our view that the tightening cycle is now at an end and the February meeting will begin the pivot towards an easing bias, we do not think that this will be enough for investors to conclude that rate cuts are imminent," currency analysts at Bank of America (NYSE:BAC) said in a note on Friday.
"Indeed, we continue to believe that the UK rates markets remains overly optimistic in its expectation for a 25bps rate cut in May."
The U.S. dollar index was last down 0.2% ahead of key inflation data later in the day, as traders weighed how the U.S. economy's faster than expected growth would influence Federal Reserve thinking on interest rate policy.
The European Central Bank held rates as expected on Thursday, and comments from its president Christine Lagarde that seemed less worried about the inflation outlook added to bets on a rate cut in April.