Sterling stays at three-month low as traders temper rate hike bets

A bank employee counts pound notes at Kasikornbank in Bangkok

By Lucy Raitano

LONDON (Reuters) - Sterling held at a three-month low against a stronger dollar on Thursday, as traders focused on dovish signals from the Bank of England and moderating corporate inflation expectations.

The dollar firmed on Thursday after U.S. jobless claims hit their lowest level since February, moving in the opposite direction to economists' forecasts and raising expectations for higher U.S. rates for longer. Sterling softened versus the dollar as a result.

"In the UK we also had Bailey's comments yesterday which were quite dovish, at least on the surface, and this means that sterling was coming into today's session with weak momentum," said Francesco Pesole, FX strategist at ING.

At 1357 GMT, the pound was down 0.4% against the "dollar at $1.2458, at its lowest since June 9. The pound was 0.1% lower against the euro at 85.86 pence.

Bank of England Governor Andrew Bailey said on Wednesday that the bank is "much nearer" to ending its run of interest rate increases but borrowing costs might still have further to rise because of stubborn inflation pressures.

Interest rate hike expectations were further tempered on Thursday after a Bank of England (BoE) survey showed UK businesses are planning their lowest price rises since Feb 2022, and expect to raise prices over the coming year by less than they had planned previously. The survey will offer some reassurance to policymakers that inflation is on course to return to target.

"It's not normally a survey that the BoE follows too closely however when you compound it with what we've been hearing from BoE speakers recently - which is arguably been quite dovish compared to what the data suggested previously - then obviously the market have scaled back rate expectations," said Pesole.

Traders are now placing a 75% chance of a 25 bps hike at the central bank's next policy meeting on Sept. 21.

Elsewhere, mortgage lender Halifax said on Thursday that British house prices have fallen at the fastest pace since 2009 over the past year, reflecting the increasing impact of higher interest rates.

(Reporting by Lucy Raitano; Editing by Sharon Singleton)