LONDON, Feb 28 (Reuters) - The British pound slipped against the stronger dollar, its first daily drop against the U.S. currency in seven trading days, with investors avoiding risks before key inflation data that could determine when central banks begin easing policy.
Thursday brings the release of the U.S. personal consumption expenditures price index for January, the Federal Reserve's targeted measure of inflation, which investors were watching for clues on when it might cut interest rates.
Analysts expect the PCE price index to moderate to 2.4% on an annual basis and the core measure to slow to 2.8%.
"There is a tone of caution in the markets this morning ahead of the incoming high-impact U.S. data, which has guided sterling lower," said Kyle Chapman, FX markets analyst at Ballinger & Co.
More volatile currencies, such as the pound, are generally more sensitive to risk sentiment in markets, while the dollar tends to benefit from safe-haven demand when markets are cautious.
The pound was last at $1.2645 against the dollar, down 0.3% and on track for its biggest one-day drop in over three weeks.
The dollar index , which measures its performance against six other currencies, including the pound, was up 0.3% at 104.11.
"Looking at the broader perspective, it's tight ranges as markets wait for the inflation data," said Danske Bank FX and rates strategist Mohamad Al-Saraf.
Germany, France and Spain publish their inflation figures on Thursday before euro area inflation as whole is released on Friday.
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But with little data out from Britain this week, some were already turning their attention to next week's Spring Budget, where some modest fiscal loosening before a possible election this year looks likely.
Goldman Sachs economist James Moberly expects possible measures announced next week to boost British output by around 0.3% with half of the effect coming from increased supply and the remainder from higher demand relative to supply.
"The modest change in the supply-demand balance at the margin reinforces our view that the BoE (Bank of England) will likely wait until June to cut Bank Rate," Moberly said in a note.
Money market traders are betting that the BoE will begin easing policy from August, with only 56 basis points of rate cuts priced this year, implying around two quarter-point moves by the end of 2024.
Reporting by Samuel Indyk Editing by Tomasz Janowski
