Pound edges up ahead of US data and Bailey speech

By Amanda Cooper

LONDON (Reuters) -The pound steadied on Tuesday, following the previous day's slide, in line with a more upbeat tone across the broader markets, ahead of U.S. inflation data and a speech by Bank of England Governor Andrew Bailey later on.

Sterling was last at $1.3435, little changed on the day and was similarly steady against the euro, which traded at 86.92 pence.

Bailey will give his annual "Mansion House" address to London's financial sector on Tuesday, along with finance minister Rachel Reeves.

The pound is still up 7.6% against the dollar this year, but it has lost over 5% in value against the euro, set for its weakest annual performance since 2022, when UK markets were hit by a crisis triggered by an interim budget from former Prime Minister Liz Truss.

Losses against the euro have accelerated in recent weeks. In the last two months, sterling has lost over 3.5%.

Investor concern over the outlook for the UK economy, which contracted unexpectedly for a second month in a row in May, is building, especially in light of the shrinking fiscal headroom that Reeves has after the government watered down a landmark reform to welfare benefits and passed a bill that blew a hole in its finances.

"That round of cuts left a 5 billion-pound ($6.72 billion) hole in public finances, one which the government seems unconfident in fixing with more cuts. All of this means that the pound is under pressure on the fiscal credibility front, not Liz Truss by any means, but a serious drag on sterling's value," Caxton FX strategist David Stritch said. 

Money markets show traders are looking for at least two quarter-point rate cuts this year from 4.25%, which implies rates at 3.6% by December. Just two months ago, markets showed the implied rate for December was closer to 4%.

"Expect Governor Bailey to reiterate a position – similar to the Fed – that faster easing is possible if the labour market deteriorates," ING strategist Chris Turner said in a note.

Investors are waiting for U.S. consumer inflation later on Tuesday that could be key in setting expectations for where U.S. rates will head over the coming Federal Reserve meetings.

There is also UK consumer inflation on Wednesday that is expected to show price pressures continued to accelerate in June.

($1 = 0.7437 pounds)

(Reporting by Amanda Cooper; Editing by Tomasz Janowski)