By Stefano Rebaudo
(Reuters) - Sterling dropped against a strengthening U.S. dollar on Tuesday, with investors closely watching economic data and market bets on the Bank of England’s future moves.
Higher yields and a strong economy usually increase demand for the nation's currency.
The pound rose more than 2% versus the greenback last week, its biggest gain in almost four months, after the BoE held interest rates at a 15-year high and stressed the need to continue fighting inflation, while U.S. yields and the greenback tumbled after the Fed suggested its tightening path was over.
Money markets priced in more than a 50% chance of rates being unchanged until June 2024 and a higher chance of a 25 basis points rate cut in August next year.
The Bank of England might wait until the middle of next year before cutting interest rates from their current 15-year high, the BoE's Chief Economist Huw Pill said on Monday.
"We think these comments are a mild sterling negative, and given the risk that Fed-speak puts equities on the back foot again, risk-sensitive sterling could hand back some of its recent gains," said Chris Turner, head of forex strategy at ING.
The dollar advanced on Tuesday as last week's rally in riskier currencies took a breather.
Sterling was last down 0.15% at $1.2320. It hit $1.2428 on Monday, its highest in more than a month.
"Markets expect the BoE to lower rates in 2024, but starting a bit later than the Fed and probably acting with less intensity," said Roberto Mialich, global forex strategist at Unicredit (BIT:CRDI), adding that the U.S. curve of policy rate forwards is leading the whole foreign exchange market.
Investors remain on hold ahead of Friday's economic data, including gross domestic product, the balance of trade and industrial production.
"Come Friday, there is a raft of UK activity indicators released, which should paint a familiar message. UK growth is anaemic, and GBP does not warrant being in a stronger position," said Paul Mackel, global head of forex Research at HSBC (LON:HSBA).
British consumer spending grew at the slowest pace in more than a year last month, reflecting concerns about the cost of living in the run-up to Christmas, according to a survey released on Tuesday.
Sterling was roughly unchanged against the euro, with the single currency down 0.01% at 86.81 pence.