Sterling hits strongest in two months on euro in holiday-thinned trade

LONDON, Dec 30 (Reuters) - The pound touched its strongest level in two months on the euro and held steady against the dollar in Tuesday's holiday thinned trading, though there was little in terms of news to jolt the currency far.

Sterling was flat on the dollar at $1.3518, just shy of last week's three-month top.

The UK currency was marginally more active against the euro, firming as far as 87.03 pence to the common currency, sterling's strongest since mid October, though that was still little more than a 0.1% move on the day.

Trading has been thin around the Christmas holiday period in Britain, and remains so in the run-up to the New Year holiday.

That has left sterling still largely shaped by the Bank of England meeting earlier in December.

The BoE cut interest rates after a narrow vote by policymakers, but it signalled that the already gradual pace of lowering borrowing costs might slow further.

Should that materialise, that would see the pound remain supported versus other currencies, particularly the dollar, with the U.S. Federal Reserve expected to continue easing next year.

Goldman Sachs analysts, however, said in a Tuesday note that with the British labour market weakening, they expect British headline inflation to fall further in the coming months.

"As a result, we expect the Bank of England to cut the policy rate three times in 2026 for a terminal rate of 3%, below current pricing," they said.

(Reporting by Alun John; Editing by Susan Fenton)