Sterling steadies after US inflation surprise

By Amanda Cooper

LONDON (Reuters) - The pound edged up on Friday, after posting its largest daily drop against the dollar the previous day since March after U.S. inflation data came in hotter than expected, unnerving investors.

Sterling was last up 0.1% on the day at $1.2178, having fallen by 1.1% on Thursday, as the dollar swept higher across the board.

Against the euro, the pound was up 0.1% on the day at 86.40 pence. Sterling fared poorly against the euro on Thursday as well, falling 0.3% in its largest one-day fall in three weeks.

Next week's data releases might offer a steer on what to expect from the Bank of England when its policymakers meet in early November to set interest rates.

"We remain of the view the BoE won't help sterling much near term, but a 'high for longer' BoE could help sterling versus euro later - we see EURGBP at 85 pence through our forecast horizon," Bank of America strategists said.

Persistently high inflation and record wage growth because of a tight labour market have complicated the BoE's efforts to anchor consumer prices.

Britain still has the highest inflation of any G7 nation and next year is expected to have the slowest growth, according to projections from the International Monetary Fund this week.

Growth in August was better than expected, but at 0.2%, is still tepid.

"Next week presents an opportunity for local UK developments to drive (sterling/dollar), something that has been absent for some time now, as UK unemployment and inflation data comes due," Richard Snow, a strategist at DailyFX, said.

"The UK has experienced a moderate easing in the job market of late and this week’s IMF World Economic Outlook revealed challenges to growth this year and particularly in 2024. These developments should help contain inflation, but higher energy prices have threatened to reignite upside risks to inflation," he said.

Money markets currently show traders believe UK rates are very close to peaking, with only a 50/50 chance of another rate rise in the BoE's current policy cycle.

(Reporting by Amanda Cooper; Editing by Kim Coghill)