LONDON (Reuters) - The pound was set for a small monthly decline against both the dollar and the euro on Thursday, on a busy day for inflation data elsewhere in the world, while investors in Britain's focus began turning to next week's budget.
Sterling was last down 0.06% against the dollar at $1.2654 and heading for a monthly decline of 0.26%.
It also softened on the day and the month versus the euro, which was up a fraction on Thursday at 85.66 pence and up 0.47% in February, albeit after a sharp fall at the start of the year.
"The pound has been consolidating at higher levels this month after strengthening in January," said Lee Hardman senior FX strategist at MUFG in a note to clients.
"We continue to hold a short EUR/GBP trade recommendation which is befitting from the higher yields on offer in the UK but has struggled to break below support at the 0.8500-level this month."
The main event in world markets on Thursday was the release of U.S. PCE inflation, the Fed's preferred gauge, which showed U.S. prices picked up in January, but the annual increase in inflation was the smallest in nearly three years, keeping a June interest rate cut from the Federal Reserve on the table.
The move was in line with expectations and did little to move currencies.
Euro zone inflation dipped further this month, according to data also released on Thursday, strengthening the case for the European Central Bank to cut rates, though investors were nervous about changing ECB pricing too much ahead of the U.S. data.
The crucial question for currency markets at present is when central banks are sufficiently confident that inflation is heading back towards their target that they cut rates, and which central banks do so first.
Hardman said that was one way through which next week's budget could be transmitted to currency markets.
British finance minister Jeremy Hunt is expected to cut taxes but is hemmed in by promises to tackle Britain's approximately 2.5 trillion pounds ($3.2 trillion) of debt.
"While the size of the potential fiscal giveaway is unlikely to be sufficient to significantly alter the performance of the UK economy, it could discourage the BoE from delivering an earlier rate cut in May or June," Hardman wrote.