By Samuel Indyk
LONDON (Reuters) - Britain's pound was falling against a stronger dollar on Wednesday ahead of policy announcements by both the Bank of England and Federal Reserve over the next two days.
The pound was last down 0.2% against the dollar to $1.2671, and was on track to lose around 0.3% this month.
"Markets are just positioning themselves before the Fed tonight and Bank of England policy meeting tomorrow," said Kirstine Kundby-Nielsen, FX analyst at Danske Bank.
Sterling is still one of the better performers in the G10 against the U.S. currency this year as Britain's economic performance has been robust and inflation has shown signs of being stickier than in other regions.
Britain's economy began 2024 on a stronger footing, the preliminary S&P Global/CIPS UK Composite PMI showed earlier this month, hitting its highest level in seven months.
UK interest rates are likely to be kept unchanged when the BoE announces policy on Thursday, with markets fully pricing the first interest rate cut by the June meeting.
Investors have slashed bets on the number of rate cuts expected from the BoE this year, with markets pricing around 100 basis points of cuts in 2024 or around four quarter-point cuts. Prior to December's inflation figures, released in mid-January, markets had expected around five 25-basis-point cuts.
In contrast, markets are pricing around 130 basis points of cuts from the Federal Reserve and almost 140 basis points of easing from the European Central Bank in 2024.
"We don't expect inflation to deviate by the extent priced by markets and expect the Bank of England to follow the cutting cycle of the ECB, where we see the same inflation dynamics," said Danske Bank's Kundby-Nielsen.
"That's one reason why we're negative on sterling from here."
The pound was down 0.1% at 85.48 pence per euro, but was still on track for an almost 1.5% gain in January, its biggest monthly rise against the single currency since May last year.
Analysts said the lack of guidance from Britain's policy makers before Thursday's announcement could induce extra volatility in the currency.
"We're operating in a bit of a void of information from the Bank of England, which is unusual coming into the first meeting of the year," said Kamal Sharma, senior G10 FX strategist at Bank of America (NYSE:BAC).