Sterling holds steady ahead of BoE rate decision

LONDON (Reuters) -The pound traded mostly steady on Wednesday, as traders marked time ahead of a Bank of England meeting, and watched out for developments in the United States, where President Donald Trump is angling to reshape the board of the Federal Reserve.

Britain's central bank is expected to cut interest rates to 4% on Thursday from 4.25%, its fifth cut in the current cycle, though some Monetary Policy Committee (MPC) members may vote to keep rates on hold given inflation is well above the bank's 2% target.

Sterling, which is trading around 0.5% higher than it was this time last week, was last up 0.1% on the day at $1.3308, but flagged against the euro, which rose 0.2% to 87.2 pence.

The UK economy is struggling with high inflation, sluggish growth and a fragile fiscal position, and the pound has lost a lot of momentum in recent weeks to show a year-to-date gain of 6.5%, compared with a peak of nearly 10% a month ago.

"That backdrop argues for cautious messaging, and we expect the MPC to stress a 'gradual and careful' approach, an outcome that should have little impact on sterling," strategists at Monex said.

"Nevertheless, any surprise dovishness or signals that tax rises in the autumn budget will weigh on growth could trigger a sell-off for the pound," they said.

George Vessey, lead FX and macro strategist at FX dealer Convera, noted on Tuesday that the options market shows traders are turning a little less bearish on the pound, reflecting a decline in demand for derivatives that give the option to sell sterling relative to those options that give the owner the choice to buy it.

"This shift reflects a more balanced outlook, as traders anticipate a cautious BoE stance amid sticky inflation (3.6%) and rising unemployment (4.7%)," he said.

A survey on Wednesday showed activity in Britain's construction sector fell by the most in more than five years last month.

S&P Global's monthly purchasing managers' index for the construction sector fell to 44.3 in July from 48.8 in June, its lowest since May 2020 and below all forecasts in a Reuters poll of economists.

(Reporting by Amanda CooperEditing by Frances Kerry)