Sterling drifts near two-month lows versus dollar

(Reuters) - The pound drifted near two-month lows against the U.S. dollar on Thursday, after sliding a day earlier when a tame inflation report boosted Bank of England rate cut bets.

Sterling was last down 0.1% at $1.29815 after breaching the key $1.30 mark on Wednesday when data showed British inflation dropped to the lowest since April 2021, and by more than economists had expected.

"The sterling bears are now testing ... a few pips below the 1.30 mark, to reverse the April to September positive trend and send the pair into a medium-term bearish consolidation zone," said Swissquote Bank analyst Ipek Ozkardeskaya.

Traders now see an 85% chance that the Bank of England will lower rates by 25 basis points at its next policy meeting in November, up from about 80% before the data. [BOEWATCH]

The expectation that stubborn inflation would see the BoE lower rates more gradually then its U.S. and European counterparts had helped send the pound to a two-and-a-half year high against the greenback in late September.

However, strong U.S. data reigning in hefty Fed rate cut bets and tensions in the Middle East have caused a relative repricing among currency pairs, boosting the dollar and weighing on the pound.

Investors are looking to British finance minister Rachel Reeves' first budget on Oct. 30 where she is eyeing tax rises and spending cuts to a value of around 40 billion pounds ($52 billion), two government sources told Reuters.

Against the euro, sterling was little changed at 83.595 pence.

A quarter point interest rate cut from the European Central Bank is nearly fully priced in at its meeting on Thursday, while President Christine Lagarde's remarks will later be parsed for any clues on the ECB's thinking on future moves.

(Reporting by Medha Singh in London; Editing by Kirsten Donovan)