By Joice Alves and Lucy Raitano
LONDON (Reuters) - Sterling steadied against the dollar and euro on Thursday after a deep slump a day earlier as Britain's softer-than-feared inflation eased tightening pressures from the Bank of England (BoE).
The pound was about flat against the euro at 88.80 pence, after recording its biggest daily drop against the single currency in two months on Wednesday when data showed UK consumer price inflation (CPI) cooled to 10.1% last month, the lowest reading since September.
Against the dollar, sterling edged up 0.13% to $1.2054, after falling more than 1% versus the greenback on Wednesday.
The better-than expected inflation figures weakened the pound amid boosted expectations that the BoE may be set to end its interest rate hiking cycle.
Money market is pricing in a 65% chance of a 25 basis points increase to the BoE bank rate in March, after which the central bank is expected to stop hiking rates.
Jane Foley, head of FX strategy at Rabobank, said the euro was holding onto the gains made against the pound on the back of the inflation report but much of the optimism for the slowing down in the inflation had been previously flagged by the BoE limiting the pound slump.
"UK inflation data speaks to the cautious optimism noted in the remarks from BoE Governor Bailey earlier this month when he noted that price pressure may have turned a corner. Consequently, the market has priced out some of the previously projected policy tightening from the BoE which has undermine the pound," she said.
Francesco Pesole, FX strategist at ING, said that despite better-than-expected recent data, he still sees a recession in the first and second quarter in the UK.
"In this sense we (ING) still think the appetite to go long sterling will be somewhat limited. Even if the dollar comes under some pressure, we still don’t think pound will be the preferred currency," he said
Earlier this week, data showed basic pay in Britain growing more quickly again in the last three months of 2022, though Britain's unemployment rate stayed close to five-decade lows while employment grew.
SCOTLAND, N. IRELAND
Media reports on post-Brexit negotiations between Britain and the European Union, the unexpected news that Scotland's First Minister Nicola Sturgeon plans to resign and the implications for the political movement aimed at Scottish independence seems to have had little impact on the pound.
"A potential Scottish referendum might have been a discussion when the next election approaches but it’s too early for that," said ING's Pesole, adding that "domestic factors" have not been affecting sterling as much as monetary policy and global risk sentiment.