Jan 22 (Reuters) - Sterling edged up against both the euro and the U.S. dollar after recent economic data painted a mixed picture, bringing the Bank of England rate outlook back into focus.
Investor attention shifted to the state of the economy after geopolitics dominated earlier in the week, as the prospect of a U.S.-Europe trade war unsettled markets.
Sterling traded at $1.3414, up 0.12%, after showing little reaction to Wednesday's inflation report.
The U.S. dollar held on to overnight gains after President Donald Trump withdrew a threat to impose tariffs on several European NATO countries over Greenland.
Earlier this week data showed Britain's jobs market weakened, potentially easing the BoE's worries about persistent inflation pressures.
"Despite the uptick in the consumer price index, we still see Bank Rate on a downward direction," said Sanjay Raja, chief UK economist at Deutsche Bank, adding the bank is sticking for now to its call for two additional rate cuts.
"However, we see risks as skewed to slower easing in the first half of 2026," he added.
The pound held steady on Wednesday, after data showed UK inflation picked up more than expected in December.
"UK employment data for November and December were weak, confirming the recent labour market slowdown, and December consumer price data was mixed, but on the cool side," said Felix Vezina Poirier, chief strategist at BCA Research.
"More Bank of England cuts will be required, with barely two 25 bps cuts priced by year-end," he added, arguing that further weak data could bring an April cut into focus.
Morgan Stanley expects the BoE to deliver its next interest rate cut in March.
The euro was down 0.05% at 86.96 pence , after hitting 87.45 pence on Wednesday, its highest level this year.
The single currency rose 0.63% against the pound on Tuesday in its biggest daily rise since early August.
Britain's government borrowed less than expected in December, helped by robust growth in tax receipts, according to data on Thursday.
reporting by Stefano Rebaudo; Editing by Jan Harvey
Source: Reuters