LONDON (Reuters) - Sterling weakened against a broadly firm dollar on Thursday ahead of a Bank of England meeting that's expected to conclude with a half-percentage-point hike in interest rates to tame inflation.
Data earlier this week showed UK inflation easing from a 41-year high but it remains high at 10.7%.
The U.S. Federal Reserve, meanwhile, hiked rates by half-a-point on Wednesday and projected rates will continue rising to above 5% in 2023.
Its hawkish message bolstered the U.S. dollar against other major currencies, pushing sterling down.
The pound was last down 0.89% to $1.23170. It was 0.2% softer against the euro, trading at 86.19 pence.
In a busy week for central bank decisions, the Swiss National Bank and Norway's central bank hiked rates on Thursday. The European Central Bank is set to raise interest rates for a fourth straight time later in the day.
The BoE will announce its policy decision at 1200 GMT and is expected to raise rates by 50 basis points. Money markets attached a roughly 30% chance to a bigger hike of 75 bps.
"Today we have the BoE, where a similar story to the Fed is expected, ie a smaller hike than last month," said Stuart Cole, head macro economist at Equiti Capital.
"But that is where the similarity will end, I expect. The UK economy is in a weaker position than the U.S. and therefore I can see the MPC (Monetary Policy Committee) adopting a less-hawkish tone than the FOMC yesterday," he said, referring to the Fed's rate-setting body.
The BoE has been hiking rates since late 2021 to contain inflation, but officials are increasingly split on how much tightening is needed as the economy faces recession.
Latest inflation data supports the idea that tightening should slow down. Data on Monday showed Britain's economy rebounding in October, but fears of a recession dominate.
"I can also see it (the rate vote) being more split. It is not out of the question to see votes for 25bps, 50bps and 75bps hikes today. But these will all be couched within a dovish message," said Cole.
In a note, ING currency analysts said they do not expect a meaningful reaction in sterling as markets are fully pricing in a 50 bps hike.
"EUR/GBP may be more impacted by potential surprises from the ECB, while some stabilisation or modest recovery by the dollar may cap GBP/USD and prevent 1.2500 from being tested before year-end," they wrote.