By Samuel Indyk
LONDON (Reuters) - The British pound extended the previous day's losses on Wednesday after gloomy economic data affirmed the view that the Bank of England will likely hold rates steady when it announces its policy decision next week.
Data on Tuesday showed a labour market that was loosening, while the flash reading of the S&P Global UK Purchasing Managers' Index (PMI) for the services sector fell in October to 49.2, the lowest reading since January and below the 50 threshold that separates growth from contraction.
"It's obvious there's some slowing momentum," said Viraj Patel, global macro strategist at Vanda Research.
"You struggle to paint a bullish picture when you have weak macro and a potentially more dovish BoE."
By 0916 GMT, the pound was down 0.2% against the dollar to $1.2132. On Tuesday it fell 0.7%, its biggest one-day drop in more than a week.
Sterling was also down 0.1% at 87.21 pence per euro, in close proximity to a 5-1/2 month low of 87.40 pence per euro reached on Friday.
The BoE is now likely done with policy tightening and will leave the Bank Rate at 5.25% on Nov. 2, according to the vast majority of economists polled by Reuters.
Money market traders also think UK rates have peaked, with rate cuts fully priced by the end of next year.
Traders had previously priced rates peaking above 6% but a slowdown in inflation and subdued growth had markets paring back expectations.
Headline inflation held steady at 6.7% last month, having reached a 41-year peak of 11.1% in Oct. 2022, but with inflation remaining above target, analysts said it might still be too soon to completely rule out future tightening.
"I'm hesitant to say the BoE is done because they are data dependent and so to make that call you need visibility on what things will look like in three months and that's pretty tricky right now," Vanda Research's Patel said.
"Based on the data seen so far, however, I don't see them hiking next week."