LONDON, Feb 2 (Reuters) - Sterling was set for its biggest weekly gain against the dollar since mid-December on Friday, a day after the Bank of England held rates steady and pushed back on bets of imminent rate cuts, while lower U.S. yields weighed on the greenback.
The pound was last up 0.08% against the dollar at $1.2753 and set for a weekly gain of 0.4%, its most in seven weeks.
It was at 85.29 pence per euro, flat on the day, but the British currency was to finish the week stronger on the euro for the sixth week in a row.
Thursday's Bank of England meeting was the main event for the pound of the week. It came in largely as expected with the BoE holding rates steady and dropping language from its statement about potentially tightening policy further if required.
However, Governor Andrew Bailey pushed back on suggestions that interest rate cuts were coming close.
He said it was too soon to declare victory and getting inflation down to its 2% target would not be "job done" because price growth was expected to pick up again. But he said there was a shift in the BoE's thinking.
"For me, the key question has moved from 'How restrictive do we need to be?' to 'How long do we need to maintain this position for?'" Bailey told a press conference.
The pound rose after the decision.
"This is a clear riposte to current market pricing which is now hard coded into the Bank's forecasts. We had recommended tactical GBP longs into the BoE decision based on precisely what has been delivered today," BofA analysts said in a note.
Markets are currently priced for four 25 basis point rate cuts from the BoE this year, with roughly a 50% chance the first one could come as soon as May.
"Notwithstanding the recent market turbulence caused by US regional banks, we continue to see the backdrop to GBP as conducive both from a rates and (volatility) perspective," BofA said.
U.S. regional banks sold off again on Thursday, adding to losses from a day earlier when New York Community Bancorp (NYCB.N), opens new tab reported increased stress in its commercial real estate portfolio.
The benchmark 10-year Treasury yield , fell a further 10 basis points, having shed around 27 bps this week. It last stood at 3.891%, and the fall in yields hurt the dollar.
The dollar index, which tracks the unit against six peers, is set for its first weekly fall of 2024.
Investors on Friday also were assessing a survey published by U.S. bank Citi on Friday that showed the British public's expectations for inflation increased in January, potentially because of worries about disruption to shipping in the Red Sea.
Reporting by Alun John; Editing by Angus MacSwan
