Sterling drops versus dollar, focus on BoE, trade talks

By Stefano Rebaudo

(Reuters) -The pound lost ground versus a strengthening dollar on Wednesday but remained near its highest levels in over three years, ahead of a Bank of England policy meeting due on Thursday.

Investors also focused on tariffs talks as U.S. Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer are due to meet China's economic tsar He Lifeng this weekend.

Britain and India clinched a free trade pact on Tuesday after tariff turmoil sparked by U.S. President Donald Trump forced the two sides to hasten efforts to increase their trade.

Analysts flagged chances of a trade deal with the U.S. soon while focusing on the May 19 UK-European Union summit as warming relations with the EU typically sees sterling rally.

The pound was last down 0.25% on the dollar at $1.3333. It hit $1.3444 on April 28, its highest since February 2022.

The greenback rose against the safe-haven yen and Swiss franc ahead of the outcome of the Federal Reserve policy meeting due later in the session.

Money markets priced in 94 basis points (bps) of BoE rate cuts by December, including 25 bps on Thursday, but some analysts argued that the central bank could be less dovish than market expectations.

Analysts argued that domestic inflation dynamics, lower global energy prices, the prospect of China re-routing a share of its exports towards Europe, and a stronger sterling all point to a lower inflation outlook over the coming quarters.

"We take a slightly more cautious view," said Shaan Raithatha, senior economist at Vanguard.

"Though we acknowledge the inflation outlook is softening, there are some near-term risks," he added, before mentioning improving growth prospects, higher utility prices and tentative evidence that the rise in national insurance contributions (NICs) and national living wage (NLW) are "starting to feed through to final prices."

The pound was also weaker against the euro, which was down 0.15% at 85.16 pence.

The BoE is expected to lower rates by a quarter point on Thursday as U.S. tariffs darken the global growth outlook.

(Reporting by Stefano Rebaudo; Editing by Bernadette Baum)