Sterling treads water as next week's BoE meeting eyed for direction

By Jemima Kelly

LONDON, July 29 (Reuters) - Sterling inched up against the dollar on Friday, staying within the ranges in which it has traded for the past two weeks, as investors eyed a Bank of England meeting next week that they expect will yield the first interest rate cut since 2009.

Data showing British consumer morale suffered its sharpest drop in more than 26 years in July, the latest sign of increasing economic pessimism following last month's vote to leave the European Union, had little impact on the currency.

A separate YouGov (LSE: YOU.L - news) /CEBR consumer confidence indicator on Thursday had also shown a sharp fall, hitting its lowest in three years.

Despite those numbers, and purchasing managers surveys last week that suggested Britain is heading for recession, sterling has proved more resilient than most major banks had forecast since it fell 14 percent in the hours after the Brexit vote.

Derivatives market indications of its future value are now far more balanced.

It edged up 0.2 percent on Friday to $1.3180. Against the euro, it was flat at 84.13 pence.

"All the confidence surveys have been dire, but they've already been priced in. So we need something new now, and that is probably the Bank of England response," said ING currency strategist Chris Turner.

"We think they will go large and early, and sterling will weaken to $1.27-1.28 towards the end of next week on the back of that," he said, adding that he expected a 25-basis-point rate cut as well as a fresh round of asset purchases.

Almost all analysts polled by Reuters ahead of the BoE (Shenzhen: 200725.SZ - news) 's two-day meeting, which concludes on Thursday, believe the bank will cut rates by a quarter point from the current record low of 0.5 percent.

But such a cut has been widely expected since the Brexit vote, meaning the bank would have to deliver more to damage sterling further.

"Our economists expect the BoE to cut rates by 25 basis points and announce 50 billion pounds of asset purchases," BNP (Paris: FR0000131104 - news) Paribas currency strategists wrote in a note to clients.

"While easing is now mostly priced into markets for next week's meeting, markets could be underpricing easing further out the curve, as highlighted by comments from two former BoE policymakers this week that a UK slowdown could warrant a move to negative rates." (Editing by Dale Hudson)