By Alun John
LONDON (Reuters) - Sterling dipped against the dollar on Tuesday, but still traded near its one-month high hit a day earlier after market turmoil led to a dramatic pullback in U.S. rate expectations and short-term yields and sent the greenback tumbling.
U.S. inflation data due later in the day will also have an effect on currencies, though while a week ago it was seen as one of the month's main events for markets its consequences will likely be somewhat swamped by recent volatility.
The pound was 0.2% lower against the dollar at $1.2156, just off the previous day's top of $1.220, its highest since Feb. 14.
Versus the euro, the pound briefly touched 87.8 pence per euro, its strongest in two weeks, before dropping back, with the European common currency last up a touch on the day at 88.25 pence.
The main British domestic macroeconomic news was official data showing pay growth lost pace in the three months to January, welcome news for the Bank of England as it seeks to rein in inflation and a further factor in the mix for its rate-setting meeting next week.
Globally, turmoil in markets following the collapse of Silicon Valley Bank has caused market pricing for central banks' rate outlooks to move dramatically in the last few sessions, and there is a now a 25% chance the Fed leaves rates unchanged at its next meeting, according to CME's Fedwatch tool.
Previously a 25 basis point (bps) hike was firmly priced in and there was a reasonable chance of 50 bps.
That has led to the dollar index, which tracks the greenback against six main peers, to fall from a high of 105.88 on Wednesday, March 8 to 103.47 on Tuesday. It was last at 103.75.
"We've seen a bit of a snap back after the big rally in cable yesterday, though in broader terms the pound is middling in the G10 and hasn't benefited in the same way as safe havens like the Japanese yen and Swiss franc," said Simon Harvey, head of FX analysis at Monex Europe, referring to the pound/dollar pair.
He said currency markets would also be watching U.S. consumer price data due later in the day. "The CPI report is still important, but it's dependent on financial risks abating," he said. "If they do abate, we'll be talking about this CPI data in a few weeks time."