LONDON, Feb 5 (Reuters) - The pound rose to its highest in a month on Wednesday as the dollar retreated further after surging two days ago on the threat of sweeping U.S. tariffs, while the focus in UK markets turned to the Bank of England rate decision on Thursday.
Sterling climbed to $1.2532 in morning trade in London, its highest since Jan. 7, and was last up 0.36% at $1.2526.
The U.S. dollar index , which tracks the currency against six peers, fell 0.5% on Wednesday. It has receded since hitting a three-week high on Monday, when it jumped as much as 1.3% as the U.S. looked set to impose tariffs on Mexico and Canada.
The dollar has since fallen around 2.1% after both Mexico and Canada won a one-month reprieve on tariffs, although the U.S. and China increased levies on each other's exports.
A 1% rally in the Japanese yen also knocked the dollar on Wednesday.
Many economists think - and British officials are hopeful - that Britain will be spared the worst of U.S. President Donald Trump's aggressive tariff policies due to a more balanced trade situation between the two countries.
That has helped the pound rise for three weeks against the euro as traders bet that the euro zone is at greater threat from U.S. levies. The euro was last steady against sterling on Wednesday at 83.11 pence .
BOE LOOMS
Traders and investors expect the Bank of England to cut interest rates by 25 basis points (bps) to 4.5% on Thursday, reflecting a slowdown in British growth and a drop in previously stubborn services inflation. The Bank will also release new growth and inflation forecasts.
The pound is down around 0.8% and 0.6% against the dollar and euro respectively so far this year as markets have priced in more BoE cuts due to slowing growth.
"We expect the BoE to cut rates by 25 bp and easing guidance will be strengthened relative to market expectations," said Geoff Yu, senior market strategist at BNY.
"Similar to the ECB (European Central Bank), at least one 25 bp cut per quarter should be in play as growth risks remain heavily to the downside, especially measured through household demand," he added
Money market pricing showed traders expected around 84 bps of BoE easing this year. The Bank started lowering its main rate from 5.25% in August.
Reporting by Harry Robertson Editing by Gareth Jones
Source: Reuters