By Joice Alves
LONDON (Reuters) - Sterling steadied against both the euro and the dollar on Wednesday ahead of a key Bank of England (BoE) meeting on Thursday, with investors split on the size of the central bank rate increase after 13 back-to-back hikes.
Sterling has climbed almost 6% this year, and is already set for its biggest annual jump since 2017, supported by the central bank's aggressive monetary tightening path.
But the BoE has now to weigh up the need to fight inflation against the hit to the economy from raising the cost of borrowing.
After a surprise 50 basis point (bps) hike in June, money markets are pricing in a 63% chance of a 25 bps rate increase by the BoE to a 15-year high of 5.25%. They see a 37% probability of a larger 50 bps increase on Thursday. [IRPR]
Yvan Berthoux, FX strategist at UBS (LON:0R3T), said it was not time to sell sterling just yet though.
"We suspect the BoE will be predisposed to remain relatively hawkish. We expect a 50 bps hike on August 3, which should support GBP in the near term," he said.
Since the BoE's last meeting, inflation data released in July showed British annual consumer prices fell to a lower-than-expected 7.9% in June, but it remained the highest among the Group of Seven economies.
In the meantime, separate data showed that economic growth was faltering. On Tuesday a survey showed that British factory output contracted in July at the fastest pace in seven months, hit by higher interest rates and fewer new orders, despite weakening price pressures, a survey showed on Tuesday.
Mike Riddell, Head of Macro Unconstrained at Allianz (ETR:ALVG) Global Investors, said he expected the BoE to hike by 25 bps as inflation showed signs of easing.
"At its last meeting, the BoE surprised markets with a 0.5% hike, but data released since then has given the Old Lady some breathing space," he said.
BoE policymakers have said the economic impact of their run of rate hikes stretching back to late 2021 has yet to be felt fully.
The pound was flat against the dollar at $1.2782, after touching a three-week low against the greenback on Tuesday. It was up 0.1% versus the euro at 85.89 pence, having touched a one-week low against the single currency overnight.