Sterling slipped against the euro and dollar on Wednesday, as traders remained cautious and were hesitant to take big positions ahead of a Bank of England interest rate decision on Thursday.
Analysts expect the Bank of England to leave rates steady, at a 6-year high of 5.75 percent as it waits to see how the global credit crunch affects the British economy. Since the end of 2006, the BoE has raised interest rates three times.
Troubles at distressed mortgage lender Northern Rock, which had weighed on the market in recent sessions, have prompted some analysts to price in at least one rate cut before the end of the year, dampening the outlook for sterling. Many analysts believe the BoE would be the next central bank to cut rates after the Federal Reserve.
"Everybody is focused on the Bank of England decision tomorrow," said Roberto Mialich, currency strategist at UniCredit. By 1410 GMT, the pound fell 0.2 percent against the dollar to $2.0378. The euro rose 0.3 percent to 69.52 pence.
Analysts at Bear Stearns say they wouldn't be surprised if the BoE does cut rates on Thursday, although they still think that scenario would be a long shot one.
"We feel that the BoE is a bit better at taking a longer-term perspective than most other central banks...It would not surprise us if the Bank were to take a more forward-looking approach than many by cutting rates as early as tomorrow," said Bear Stearns in a research note.
Against the yen, sterling was up 0.5 percent at 237.35, helped by the market's improved risk appetite as investors sold the low-yielding yen to buy high-yielders such as the Australian dollar in carry trades.
The British currency earlier showed little reaction after data showed the UK service sector growing at its slowest pace in more than a year. Inflationary pressures, however, continued to linger, with the prices charged index rising to 53.5. Sterling was at 102.6 on the BoE's trade weighted basis, down 0.2 percent on the day.
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