By Joice Alves
LONDON, Sept 27 (Reuters) - Sterling fell to a fresh six-month low against a strengthening dollar on Wednesday as markets are pricing in that the Bank of England (BoE) is done hiking interest rates as the economy deteriorated, while British inflation subsided.
Sterling is set for the biggest monthly drop since August 2022, down more than 4% in September, as money markets are pricing in further BoE rate hikes this year, according to LSEG data. Traders also expect the central bank to start cutting rates summer.
The BoE kept rates on hold last week - the first meeting at which it had done so since December 2021 - on the back of signs economic growth is slowing and data showing a surprise cooling in Britain's inflation.
Sterling dropped 0.06% to $1.2150 GBP=D3, after briefly touching $1,2135, its lowest since March 2023. It has been steadily sliding from a 15-month high in July, but is still up almost 18% from a year ago when former British Prime Minister Liz Truss' borrowing plans drove it to a record low.
The British currency rose 0.1% against the euro EURGBP=D3 to 86.87 pence, after touching on Tuesday its lowest of 87.05 pence against the single currency since May.
"The capitulation in terminal rate expectations, allied to the realization that the BoE is done (hiking rates) due to building macro headwinds, underlines residual sterling headwinds," Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets, said.
Recent data showed British companies endured a much tougher September than feared, marked by growing unemployment and recession risks.
The key releases are consumer credit and mortgage approvals due on Friday, which will likely maintain ongoing pressure on sterling, Stretch added.
The prospect of higher-for-longer U.S. rates supported the dollar index, sending the greenback to its highest level since November against a basket of peers.
(Reporting by Joice Alves; Editing by Sharon Singleton)