By Ritvik Carvalho
LONDON (Reuters) -Sterling dipped against the dollar on Tuesday with potential volatility expected by analysts ahead of Thursday's Bank of England meeting and the Scottish parliamentary elections.
The BoE is expected by some analysts to announce tapering, or a reduction in the pace of its bond purchases at its meeting.
"Policy metrics will remain on hold with the need for on-going support maintained," said Stuart Cole, head macro economist at Equiti Capital.
“But what is approaching much faster is a decision on the pace of the asset purchase programme, where the BoE needs to begin paring back the pace of purchases if it is to remain within the year-end programme limit," Cole said. "Accordingly, it will be any statement or sense of what the BoE’s thinking is on tapering that will be the focus for the markets this week.”
Meanwhile, the Scottish National Party (SNP) is expected to win a majority in the Scottish parliament, which some see as a risk for Britain.
The SNP has pledged to call for a second Scottish independence referendum, although permission to do so will need to be granted by the UK government in London.
"Although the Scottish election may bring back negative headline news about another Scottish independence referendum, we don't think this should have an overly negative impact on sterling," ING's chief EMEA FX strategist Petr Krpata and developed market economist James Smith said in a note.
"This is because (a) a referendum could be years away rather than months; (b) as we observed with the Brexit referendum, the risk premium started to be built into the pound only six months ahead of the event; and (c) the first Scottish referendum in 2014 did not translate into a material build-up of GBP risk premium."
Sterling was 0.3% lower to the dollar by 1446 GMT at $1.3863. Against the euro it rose 0.06% to 86.68 pence.
Speculators increased their net long positions on the pound in the week up to last Tuesday, CFTC data on Friday last week showed.