Sterling edges up ahead of Fed, investors uncertain about BoE policy path

By Stefano Rebaudo

(Reuters) -Sterling was marginally higher on Wednesday as investors awaited the outcome of the Federal Reserve's policy meeting, after digesting news this week of a trade deal between the United States and the European Union.

The greenback edged lower as investors shifted their focus to the Federal Open Market Committee meeting later in the session and upcoming economic data.

The pound was up 0.15% to $1.3374, after hitting $1.33079 on Tuesday, its lowest level since May 19.

The euro was down 0.12% at 86.38 pence per pound, its lowest since July 11. On Monday, it hit 87.69 pence - its highest level in over two years - before falling 0.78% in its largest one-day drop since April.

Investors are divided on sterling, partly due to disagreement on whether the Bank of England will step up the pace of its rate cuts later this year.

Inflation in Britain has proven sticky, meaning policymakers could be unwilling to ease monetary policy, but soft economic data has not yet definitively answered that question. “The rapid deterioration in the economy puts the Bank of England in a quandary, and begs the question as to whether the Monetary Policy Committee will prioritise propping up growth and the jobs market, or maintaining price stability,” said Enrique Diaz-Alvarez, chief economist at Ebury.

“Sterling may instead be driven by expectations for next week’s Bank of England meeting,” he added, noting that this week offers limited macroeconomic news aside from some second-tier housing data due on Friday.

Last week’s economic figures showed the British economy was struggling to grow, while retail sales grew less than expected.

Britain's economy will keep the BoE on course to cut rates in August and November despite inflation remaining above target, according to most economists polled by Reuters.

Money markets priced in nearly two 25-basis-point rate cuts by year-end, and a cumulative 80 basis points by December 2026.

(Reporting by Stefano Rebaudo; Editing by Alison Williams)