Sterling at weakest in months versus dollar, lowest in years against euro

LONDON (Reuters) -The pound hit its weakest in nearly three months against the dollar and in more than two years versus the euro on Wednesday as rising expectations for a rate cut from the Bank of England by year-end pushed the currency through closely watched levels.

Sterling was last down 0.5% on the dollar at $1.3209, its lowest since August 1.

Meanwhile the euro gained 0.34% to 88.10 pence, its highest since May 2023, building on its 0.5% gain the previous day, on lower food inflation and reports that the British finance minister will have a larger-than-previously-thought fiscal hole to fill in her budget next month.

Analysts at Goldman Sachs said the break above the 88 pence level had provided a "technical element to the move" as well as news suggesting slowing inflation in Britain.

"We think that dynamic can continue for sterling, where softer data and a reassessment of Bank of England easing can drive underperformance on European crosses," they said, though they said the BoE meeting next week was a reason for near-term caution.

Goldman economists also changed their BoE call on Wednesday, and they now see the central bank cutting rates by 25 basis points at next week's meeting.

Markets still only see around a 40% chance of the BoE cutting rates at that meeting but they do see a 70% chance of a cut in either November or December.

Until last week's softer-than-expected inflation data, markets had seen a rate cut this year as unlikely.

The pound also weakened against other European peers.

It is at its lowest against the Swiss franc and Swedish crown since the aftermath of Britain's mini-budget crisis in 2022.

(Reporting by Alun JohnEditing by Gareth Jones)