Sterling edges higher ahead of central bank meetings

By Stefano Rebaudo

(Reuters) - Sterling edged up on Wednesday but remained within striking distance of an almost three-week low versus the dollar and the euro ahead of crucial central bank policy meetings in Britain and the United States. Investors expect the Federal Reserve to detail plans to end its bond purchases on Wednesday as policymakers shift their focus towards what to do about a surge in inflation.

Meanwhile the Bank of England heads into its most unpredictable rate decision in years on Thursday.

Sterling rose 0.3% to $1.3658 by 1551 GMT, not far from the low of $1.3606 hit on Oct. 13. It was up 0.3% against the euro at 84.79 pence. According to PMI data released on Wednesday, British businesses reported faster growth in October, suggesting the economy regained momentum last month, despite supply-chain disruptions.

Sterling traders are keen to understand the Fed's inflation outlook and whether its timeline for rate normalisation might encourage the BoE to delay hiking. “We had felt that EUR/GBP could correct to 0.8500 on our baseline scenario of a split BoE vote to hike and some indirect protest (about the current market pricing of future interest rates) via the consumer price index (CPI) forecast,” ING analysts said. But "slightly higher levels - e.g. 0.8540/60 - could be seen on BoE-day tomorrow", they added. HSBC analysts saw three possible outcomes from Thursday's BoE meeting: a 15 bps rate rise, with or without the central bank pushing back on market pricing of future interest rates rise, and no rise at all. "One of the three (scenarios) is likely to generate sterling strength," they said, adding they maintained a short GBP-USD trade idea targeting 1.3450. But even in the more hawkish outcome - a rate hike without the BoE pushing back market expectations - the pound would "struggle to move beyond recent highs around 1.3850 until the market expects a more sustainable hiking cycle", they added. A calmer tone took hold in a spat over fishing between London and Paris which has weighed on the pound, as French transport minister Jean-Baptiste Djebbari said Britain had shown a "constructive" spirit in the talks.

But Ireland's prime minister warned Britain of far-reaching implications for its relations with the European Union if it seeks to suspend parts of the Northern Irish protocol in its Brexit divorce deal.

(Reporting by Stefano Rebaudo; Editing by Alison Williams)