LONDON (Reuters) - The pound strengthened against the dollar on Tuesday and held steady on the euro as markets continued to digest the implications of last week's central bank meetings, including the Bank of England's.
The pound was last up 0.17% against the dollar at $1.2658, extending gains from the previous day and moving further off a one-month low of $1.25755 hit on Friday following the BoE meeting the day before.
Those gains on Tuesday were largely a result of the weakening dollar. The pound was unchanged versus the euro, with one euro worth 85.75 pence.
Euro/sterling has traded in a very narrow range in recent months and one month volatility for the pair is currently around its lowest since 2006.
The quiet data calendar is offering traders "the opportunity to take stock of last week's market moves. On the UK side of the equation this meant a modest unwind of BoE easing expectations ... which seemed overly aggressive to us coming into the week", analysts at Monex Europe wrote in a note.
Current market pricing shows roughly a 65% chance the British central bank starts cutting rates by its June meeting, with a very small chance of a move at its next meeting in May, a slight decline from the day before.
Markets last week had seen August as the most likely date for the first BoE rate cut, but traders adjusted their expectations after the central bank said at its Thursday meeting that inflation is moving in the right direction for interest rate cuts.
Markets are now pricing in a broadly similar rate trajectory for the BoE, European Central Bank and the U.S. Federal Reserve, seeing each of them beginning monetary easing in June with a 25 basis point rate cut, with two further cuts this year.
Should those expectations remain aligned, analysts say moves sterling/dollar, euro/sterling and euro/dollar are all likely to remain fairly muted.