By Alun John
LONDON (Reuters) - The pound dipped against the dollar though it firmed against the euro on Monday as markets continued to digest the previous week's 25-basis-point rate increase by the Bank of England, and its implications for future monetary policy.
Sterling was last at $1.27215, down 0.24%, in line with Monday's broad strengthening of the dollar, and holding just above its five-week low against the dollar of $1.26200 hit briefly after the Bank of England's move.
The BoE raised rates by 25 bps to 5.25% last Thursday, a slowdown from its 50 basis point hike in June, but said high inflation meant rates would remain elevated for some time.
Currencies are very sensitive to central bank policy at the moment and markets are pricing in two more 25-basis-point rate increases from the BoE.
This compares to pricing that reflects expectations that the U.S. Federal Reserve is finished with its hiking cycle and a reasonable chance the European Central Bank could be done as well.
The euro was at 86.23 pence, down 0.17%.
"I think markets, in terms of the pound, are slowly digesting where the Bank of England is going to end up," said Nick Rees, FX analyst at Monex Europe.
"That's the key for us in terms of where the pound ends up, and that's really going to really hang on the jobs and wages data that we see next week."
"It's a case of wait and see, and perhaps wait to see what Huw Pill says later today."
Pill, the BoE's chief economist, speaks at 1600 GMT on Monday.
British second-quarter GDP data is due Friday, though Rees said it was unlikely to spark a major reaction in the pound.
The week's main event for currency markets is U.S. inflation data, due Thursday, which will underscore or challenge market expectations that the Fed has finished its rate-raising cycle.