Sterling GBP=D3 gained 0.49% to US$1.3227, a session high, recouping yesterday’s losses.
The BoE is widely anticipated to keep interest rates at 5% tomorrow, after official figures showed that inflation stood at an annual rate of 2.2% in August, unchanged from July, despite a pick up in price growth in the services sector.
Meanwhile, industry data showed British supermarket sales growth slowed over the last month as consumers trimmed spending after their summer holidays.
“Looking through the BoE’s range of underlying services measures, we still see some marginal improvement in the data despite the uptick in the headline services measure, with underlying inflation continuing to ease.
“This is good news for the Monetary Policy Committee (MPC),” said Sanjay Raja, chief UK economist at Deutsche Bank, referring to the BoE’s MPC.
“That said, today’s data won’t be enough to trigger a surprise rate cut tomorrow,” Raja added.
Futures markets now imply a smaller chance of a quarter point cut, at 26%, versus about 38% at the beginning of the week.
“Sterling looks pretty strong,” said ING currency strategist Francesco Pesole, adding euro-sterling was not likely to jump back to 85 pence for now.
The euro slipped 0.25% against the pound EURGBP=D3 to 84.235 pence.
“We are still expecting a bit of a weaker year end for sterling,” if the BoE starts moving a bit faster with rate cuts, Pesole said.
Looking past the MPC decision on Thursday, markets are wagering on 50 basis points of cuts in total from now until the end of the year.
The BoE cut rates by a quarter of a point last month.
Analysts at Lloyds Bank wrote in a note that slow steady progress in reducing inflation “ought to still justify a gradualist approach” in easing monetary policy.
“Arguably what the Fed does and says today matters at least as much for the November MPC outcome as what the MPC says tomorrow,” they said.
The Federal Reserve is expected to make its first interest rate cut in more than four years, with markets pricing a 65% probability of a 50-basis point cut.
The European Central Bank cut rates by 25 basis points last week.