By Joice Alves
LONDON (Reuters) - Sterling steadied on Tuesday as traders waited for service sector data due on Wednesday and pondered whether any positive impact from expected higher interest rates on the British currency has run its course.
In trading thinned by a bank holiday in the U.S., sterling edged 0.08% higher against the dollar at $1.2701 by 0930 GMT, 1.2% below the 14-month high it touched against the dollar last month.
Against the euro, the pound rose 0.16% to 85.84 pence, moving towards a 10-month high touched against the single currency last month.
Amid fears that more expected rate hikes by the Bank of England (BoE) could slow the British economy further, traders are awaiting PMI service data due on Wednesday to gauge business sentiment.
"While a modest uptick in yesterday’s manufacturing PMI may have moderated the real-economy headwind, the key variable for UK macro activity remains services sentiment," said Jeremy Stretch, head of G10 FX strategy at CIBC.
"Any signs of a correction in tomorrow’s final services PMI ... risks dragging on sterling sentiment and positioning," Stretch said.
A survey showed on Monday that the pace of decline in Britain's manufacturing sector steepened in June and optimism faded despite weakening price pressures.
The S&P Global/CIPS UK Manufacturing Purchasing Managers' Index (PMI) fell to 46.5 from 47.1 in May, its lowest reading this year and one of the weakest since the 2008-09 financial crisis, but was revised up from an earlier preliminary "flash" reading of 46.2.
The BoE is watching economic indicators closely as it judges how many more interest rate hikes are needed to control Britain's rate of inflation.
The central bank raised interest rates by half a point two weeks ago to 5%, and markets expect it to deliver an identical increase when it meets on Aug. 3.
Money markets are pricing in that BoE rates will peak only in March 2024 at 6.28%.
A month ago, the expectation was for a peak around 5.3% by the end of this year, with the first rate cut following a few months later. Traders now expect no rate cuts until May next year.
For now, said Jane Foley, head of FX strategy at Rabobank,
"sterling is set to lack fresh direction given the absence of major UK data releases and in light of the U.S. holiday."
"That said, we maintain the view that positioning in the GBP has been looking stretched and that cable could struggle to surpass recent highs," Foley added.