Sterling firms as traders digest PMIs, await Bailey speech

Oct 3 (Reuters) - The pound firmed slightly against a broadly weaker dollar on Friday, with traders digesting news that business activity growth was slowing while they awaited remarks from Bank of England governor Andrew Bailey.

They were also looking ahead to British finance minister Rachel Reeves' budget due in eight weeks.

At 1040 GMT, the pound was up 0.1% against the dollar at $1.3449, and 0.1% lower versus the euro at 87.25 pence .

A PMI survey published Friday showed British business activity grew at the slowest pace in five months in September as companies and consumers put big spending decisions on hold as they waited to see if they would be hit by tax rises in November's budget.

It follows a Bank of England survey that on Thursday showed British businesses have the joint weakest hiring intentions since 2020 and expect the fastest consumer price inflation since early 2024.

Market players will be listening carefully when governor of the Bank of England Andrew Bailey delivers a keynote speech at a farewell symposium for Dutch central bank governor Klaas Knot later on Friday.

"If he does indeed touch on monetary policy, we think that he will side with the hawks and indicate to markets that persistent inflation pressures are likely to put pay to further cuts during the rest of the year," said Matthew Ryan, head of market strategy at Ebury.

Traders are betting on no change to interest rates at the BoE's next meeting on November 6, and on a further two cuts next year.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said that cable remained unappealing due to budget pressures, and pointed to elevated yields on British gilts that are also diverging from U.S. 10-year yields.

"That's a drag on sterling, as higher yields narrow fiscal headroom, raise the chance of further tax hikes or spending cuts, and lower UK growth expectations," wrote Ozkardeskaya.

(Reporting by Lucy Raitano; Editing by Alex Richardson)