FOREX-Sterling slides as inflation cements BoE cut expectations, dollar up before US inflation

(Updates prices and headline; adds comment and news)

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ECB expected to hold rates on Thursday, BOE cut fully priced

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BOJ expected to raise rates on Friday

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Dollar wobbles as policy path for 2026 remains murky

By Joice Alves

LONDON, Dec 17 (Reuters) - Sterling slid on Wednesday after British inflation unexpectedly fell sharply, a day before the Bank of England is widely expected to cut interest rates. The dollar rose as traders waited for U.S. inflation data for clues on the Federal Reserve's next move.

Sterling was set for its biggest one-day drop in one month as investors added to bets that the BoE will cut rates on Thursday after data showed British consumer price inflation fell to 3.2% in November, its lowest since March, from 3.6% in October.

"This is still far from the 2% target rate; however, it has been enough to cement expectations of a rate cut from the BoE tomorrow," said Kathleen Brooks, research director at XTB.

Modupe Adegbembo, economist at Jefferies, said moderating wage growth and easing price pressures alongside soft activity and the disinflationary impact of Budget measures also supported the case for a rate cut.

Sterling fell 0.6% to $1.3338, easing away from the two-month high it touched on Tuesday after data showed Britain's unemployment rate hit its highest since the start of 2021 and private sector pay growth was the weakest in nearly five years in the run-up to the annual budget announcement last month.

US DOLLAR WAITS FOR INFLATION DATA

The dollar index, which measures the U.S. currency against six others, rose 0.35% to 98.54, still not far from the lowest level since early October hit on Tuesday. The index is down about 9.5% this year, on track for its steepest annual decline since 2017.

Traders are waiting for U.S. consumer price index data due on Thursday for more clues on the Fed's next move, after soft employment data earlier this week left markets and analysts unsure if the report had changed the policy outlook much.

"If CPI comes in as expected later this week then the Fed will definitely not be feeling pressure to ease at the next few meetings," said Thomas Mathews, head of markets for Asia-Pacific at Capital Economics. "Even March may be a bit too soon to expect a cut."

CENTRAL BANK MEETINGS IN FOCUS The Fed cut rates as expected last week but signalled borrowing costs are unlikely to drop further in the near term, projecting just one more rate cut in 2026. But markets are pricing in two rate cuts next year, although a January move is unlikely. Central banks are due to end the year with a bang with a host of policy decisions due this week which includes BoE and ECB on Thursday and the Bank of Japan, expected to raise interest rates on Friday to a three-decade high.

The yen weakened 0.5% to 155.46 per dollar ahead of the BOJ meeting, where the focus will be on the forward guidance and where the policy rate is headed in 2026.

The euro was 0.26% weaker at $1.1715, after touching a 12-week high on Tuesday ahead of the ECB policy decision, where the central bank is expected to hold rates steady. Last week, ECB board member Isabel Schnabel said the central bank's next move may be an interest rate hike, rather than a cut, but it will not happen in the near future. Europe's largest economy continues to struggle to grow, with a survey showing that German business morale unexpectedly fell in December. (Reporting by Joice Alves in London, Ankur Banerjee in Singapore; Editing by Hugh Lawson, Kirsten Donovan)