By Stefano Rebaudo
(Reuters) - Sterling hit a fresh one-month high against the euro and rose versus a weakening dollar on Wednesday after UK inflation data suggested less monetary easing by the Bank of England (BoE).
British consumer price inflation slowed by less than expected to a two-and-a-half-year low of 3.2% in annual terms in March, down from a 3.4% increase in February.
The dollar dipped but was still within striking distance of its 5-1/2-month high after Federal Reserve officials reiterated U.S. interest rates are likely to stay higher for longer.
The pound was last up 0.35% against the dollar at $1.24. It was up 0.16% at 85.30 pence per euro, after hitting its highest level since mid-March at 85.21 pence.
"While both the main and core measures of inflation eased to their lowest levels since late 2021, the continued stickiness in services inflation, in particular, may elicit a cautious approach among Monetary Policy Committee members," said Matthew Ryan, head of market strategy at financial services firm Ebury.
"We still see a realistic possibility of looser policy in the summer, although today's data has somewhat put a spanner in the works," he added.
In the first quarter of 2024, a tight labour market and a trade shock from energy prices led analysts to expect that the BoE would likely be cutting rates behind the European Central Bank and the Fed.
The backdrop has changed quite radically in recent weeks.
Markets are currently fully pricing a first move by the BoE by September, a first ECB rate cut by June, and the Fed to decide to ease its monetary policy in the fourth quarter.
Analysts said the consensus also favoured a shallower profile for BoE rate cuts versus the ECB over six months.
"Additionally, the poor state of public finances suggests little room for manoeuvre for the new Chancellor. The latter implies that the election could be a reassuringly boring event for markets," said Jane Foley, forex strategist at Rabobank.
British Prime Minister Rishi Sunak's Conservative Party is set for a heavy defeat at a national election expected this year, according to a projection published early this month, which showed the opposition Labour Party winning more than 400 seats. Some analysts feared the Labour Party could advocate an increase in public spending, threatening financial stability.