Sterling hovers near one-year high as traders eye BoE decision

Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna

LONDON - Sterling eased against the U.S. dollar on Tuesday but stayed close to the previous day's one-year high, ahead of the Bank of England (BoE) policy decision later this week.

At 0904 GMT, the pound was down 0.3% against the dollar at$1.26145, while it ticked 0.17% higher versus the euro to 87.06 pence.

Sterling remains close to a more than one-year high hit on Monday, when it touched $1.26680 - the strongest level against the dollar since April 26 2022.

Stronger-than-expected economic data in the UK, which has so far dodged a deep recession, is one factor behind the pound's robust performance, as well as a weaker dollar, which has been dragged down by slower U.S. inflation and by growing expectations that the Federal Reserve is nearing the end of its rate hiking cycle.

The BoE has raised interest rates 11 times since December 2021 as it battles to bring down double-digit inflation.

For Simon Harvey, head of FX analysis at Monex Europe, a key factor to watch will be how the BoE manages expectations.

"Given the BoE has been consistent in pushing back on market expectations, should the market implied inflation forecasts not show inflation substantially falling below the 2% target over the medium-term, sterling is likely to rally," said Harvey.

Traders are predicting a 98% chance of a 25 bps hike from the BoE this week.

The market is also awaiting key U.S. inflation figures on Wednesday which will provide more direction on the world's largest economy's battle against inflation.

(Reporting by Lucy Raitano; Editing by Alexander Smith)