UPDATE 2-Sterling edges up against dollar, little changed versus euro

Recasts, adds background

May 11 (Reuters) – Sterling barely changed against the euro on Wednesday, while it edged up versus the dollar but still within striking distance with its lowest since June 2020.

The dollar weakened after moving sharply off its lows and briefly turned positive on the day after economic data showed inflation was unlikely to cause the Federal Reserve to adjust their aggressive path of monetary policy. nL2N2X31E0

Analysts said the pound would be capped by markets scaling back hawkish expectations about the Bank of England’s policy stance and by uncertainty around the British economic outlook.

Money markets were pricing in around 110 basis points (bps) of Bank of England rate hikes by year-end, from 120 bps late last week and around 145 bps at the end of April. BOEWATCH

Expectations for rising interest rates usually boost the value of a currency.

“Sterling is the easier short because the rate hikes are priced in, the slowdown is happening before our eyes, and the political backdrop is a threat to sterling too,” SG forex analysts said.

Britain is on course to enter a technical recession in the second half of this year, an economic think tank said on Wednesday. nL5N2X2762

At 1509 GMT, the pound was up 0.1% against the U.S. dollar at $1.2336, GBP=D3 just above its lowest level since June 2020, which was $1.2262, reached on Monday.

It was down 0.02% versus the euro at 85.47 pence. EURGBP=

“Politics is never far from sterling and could weigh on it at any time,” ING analysts said, mentioning risks of UK-EU trade relations deteriorating again.

Britain rejected on Wednesday European Union proposals to resolve a standoff over post-Brexit trade rules for Northern Ireland, saying it might take direct action in a move Ireland said would trigger legal action by Brussels. nL5N2X325R

Britain wants a full overhaul of the agreement, while the EU is looking for changes within the terms of the existing deal.

(Reporting by Stefano Rebaudo; Editing by Angus MacSwan)

((stefano.rebaudo@thomsonreuters.com ; +39. 0266129431; Reuters Messaging: stefano.rebaudo.thomsonreuters.com@reuters.net))