Sterling edges up as markets await U.S. inflation data

LONDON (Reuters) - Sterling made marginal gains on Thursday against the dollar and the euro, as attention remained on U.S. inflation data due later in the session for clues on future rate hikes in the world's largest economy.

The pound was up 0.18% to $1.21650 and was 0.11% higher against the euro, trading at 88.430 pence.

Britain's murky economic backdrop remains in focus for traders, with a survey on Thursday showing its construction sector stagnated at the end of last year, with home-building particularly hard hit in the face of rising borrowing costs.

After dropping 10.6% versus the dollar in 2022, the pound is clinging to a 0.5% gain year-to-date.

"A lack of optimism surrounding the outlook (could) keep GBP soft for now," Mizuho senior economist Colin Asher said in a note. He forecasts the pound will reach $1.31 versus the dollar by the fourth quarter of 2023.

The BoE has hiked interest rates nine times since December 2021 in an attempt to lower inflation that remains near a 41-year high, while attempting to avoid a deep recession.

On Wednesday, the pound fell to its lowest level since late September against a surging euro, which hit a seven-month peak amid hawkish messaging from European Central Bank officials.

Currency traders are looking to U.S. inflation data due for release on Thursday at 1330 GMT. It could give markets a glimpse into whether the Federal Reserve will slow the pace of rate hikes.

(Reporting by Lucy Raitano; Editing by Kim COghill)