Oct 27 (Reuters) - Sterling was set to snap a three-session losing streak against the euro on Monday, as investors paused ahead of a week crowded with central bank policy decisions.
Last week’s UK inflation data prompted markets to increase bets on Bank of England rate cuts, while 2-year gilt yields dropped by 7.5 basis points, before rising by 2 bps on Thursday and Friday. They were roughly unchanged at 3.80% on Monday.
Traders have priced in a 67% chance of a BoE rate cut by year-end from less than 50% before last week's inflation data, while fully pricing in two reductions by June 2026.
The euro dropped 0.14% to 87.22 pence after hitting 87.47 pence on Friday, its highest since October 6.
Friday's euro zone purchasing managers' surveys strengthened expectations that the European Central Bank will keep its deposit facility rate at 2% into 2027 , with markets pricing out the chance of a rate cut in 2026.
However, some economists' base case is for the BoE to keep policy on hold until its February meeting, which would likely see a partial unwinding of the recent rate differential moves that have pushed sterling lower.
“Fiscal events remain the dominant factor for the pound in the medium term and we stand by our view that the bar for a positive outcome for sterling is not particularly high,” Barclays’ strategists said in a research note, noting that the BoE's Monetary Policy Committee is split between hawks and doves.
There is a high probability the committee will be almost evenly divided when it votes on interest rates in November.
Most investors have priced in that British finance minister Rachel Reeves will raise tens of billions of pounds in taxes in her budget onNovember 26 to stay on track to meet her fiscal targets and avoid a loss of confidence in the bond market.
The pound was up 0.20% to $1.3345 , snapping a five-session losing streak.
The greenback was mixed, coming off a six-day rally against the yen and a three-day losing streak versus the euro.
Reporting by Stefano Rebaudo. Editing by Mark Potter
