By Amanda Cooper
LONDON (Reuters) - The pound fell on Tuesday, ignoring data highlighting a few bright spots in Britain's economy, as investors focused more closely on the outlook for UK rates relative to others, after the Reserve Bank of Australia delivered a surprise hike.
Sterling slipped by 0.3% against the dollar to $1.2457 and by 0.1% versus the euro to 87.91 pence.
Against the Australian dollar, it dropped as much as 0.6% after the RBA stunned markets with a quarter-point rate rise overnight and said it may have to raise again as inflation is still far too high.
Separate data releases on Tuesday showed British factory output and new orders contracted at the start of the second quarter of 2023, but manufacturers were more optimistic and input costs rose at the weakest rate since May 2020.
Meanwhile, the British Retail Consortium said food prices staged their largest annual increase on record in April, but this could mark a peak, while mortgage lender Nationwide said UK house prices rose last month, breaking seven straight months of declines.
With the Federal Reserve and the European Central Bank meeting this week to discuss policy, activity in sterling could be fairly muted, analysts said.
"It looks like sterling will take a back seat to events in the U.S. and euro zone this week. The market has settled on pricing a 25-bp Bank of England hike to 4.50% on 11 May – with which we agree," ING strategist Chris Turner said.
"The market also prices the Bank Rate close to the 4.90% area by November, a view with which we disagree," he added.
The BoE meets next week. Money markets show traders fully expect another quarter-point rise to 4.50% and then again to a peak of close to 4.90% by November, a view that ING's Turner said the bank did not agree with.
Sterling is vying with the Swiss franc for the title of best-performing major currency against the dollar this year - both show a gain of about 3%. But this has largely been a function of quite how badly the pound was ground down last year.
In April, speculators made the biggest addition to their bullish bets on the pound in almost two years, according to data from the Commodity Futures Trading Commission.
Investors now hold a long position in sterling worth $453 million, compared with a short position worth $6.3 billion a little over a year ago.
Asset managers in particular, have been eroding their bearish position in sterling almost uninterruptedly since September, when sterling hit a record low against the dollar, according to CFTC data.