Sterling drops as inflation cements BoE cut expectations, dollar up before US inflation

By Joice Alves LONDON, Dec 17 (Reuters) – Sterling fell on Wednesday after British inflation unexpectedly fell sharply, a day before the Bank of England is widely expected to cut interest rates. The dollar rose as traders waited for U.S. inflation data for clues on the Federal Reserve's next move. Sterling was set for its biggest one-day drop since early November as investors added to bets that the BoE will cut rates on Thursday after data showed British inflation unexpectedly fell sharply in November. [GBP/] British consumer price inflation fell to 3.2% in November, its lowest since March, from 3.6% in October, official figures showed. "The decline in inflation leaves little doubt about the cut we expect the BoE to deliver tomorrow," said Modupe Adegbembo, Economist at Jefferies. Recent data also supports a BoE cut with Britain's wage growth moderating, price pressures easing alongside soft activity and the disinflationary impact of Budget measures, she added. Sterling fell 0.7% to $1.3326, easing away from the two-month high it touched on Tuesday after data showed Britain's unemployment rate hit its highest since the start of 2021 and private sector pay growth was the weakest in nearly five years in the run-up to the annual budget announcement last month.  Elsewhere, the dollar index, which measures the U.S. currency against six peers, rose 0.35% to 98.54, still not far from the lowest level since early October hit on Tuesday. The index is down about 9.5% this year, on track for its steepest annual decline since 2017. Traders are waiting for U.S. inflation data due on Thursday for more clues on what could be the Fed's next move, after soft employment data earlier this week left markets and analysts unsure if the report had changed the policy outlook much. "If CPI comes in as expected later this week then the Fed will definitely not be feeling pressure to ease at the next few meetings," said Thomas Mathews, head of markets for Asia-Pacific at Capital Economics. "Even March may be a bit too soon to expect a cut." CENTRAL BANK MEETINGS IN FOCUS  The Fed cut rates as expected last week but signalled borrowing costs are unlikely to drop further in the near term, projecting just one more rate cut in 2026. But markets are pricing in two rate cuts next year, although a January move is unlikely. Central banks are due to end the year with a bang with a host of policy decisions due this week which includes BoE and ECB on Thursday and the Bank of Japan, expected to raise interest rates on Friday to a three-decade high. The yen weakened 0.5% to 155.505 per dollar ahead of the BOJ meeting, where the focus will be on the forward guidance and where the policy rate is headed in 2026. The euro was 0.2% weaker at $1.1719, after touching a 12-week high on Tuesday ahead of the ECB policy decision, where the central bank is expected to hold rates steady. (Reporting by Joice Alves in London, Ankur Banerjee in Singapore; Editing by Hugh Lawson)

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