LONDON, Nov 20 (Reuters) - The pound nudged up from a two-week low on the dollar on Thursday as investors continued to process the previous day's inflation data and position for Britain's much-discussed upcoming budget.
Sterling was last up 0.17% on the dollar at $1.3076 , on track for its strongest day in almost a week.
It was also set for its biggest daily gain on the euro this month, with the euro down 0.3% at 88.11 pence, though both milestones were more a function of the pound's recovery from recent weakness than any particular excitement on Thursday.
Data on Wednesday showed British consumer price inflation fell to 3.6% in October from September's 18-month high of 3.8%, as expected by the BoE and economists polled by Reuters.
That reassurance caused markets to become more confident that the Bank of England will cut rates next month and weighed on the pound which hit its weakest in well over two years on the euro on Wednesday.
Markets are now pricing in a roughly 80% chance of a 25-basis-point rate cut.
However, Britain's annual autumn budget, which will be published on November 26, is one of the most significant events of the year for investors.
British finance minister Rachel Reeves is expected to need to raise tens of billions of pounds to stay on track to meet her fiscal targets in the annual budget, and media reports last week that she would not raise taxes roiled British assets.
"It's very difficult and I think there's quite a bit of bad news already priced in," said Kenneth Broux, head of corporate research FX and rates at Societe Generale, "but it doesn't mean that it can't get worse."
"If the gilt market (British government bonds) have absolutely no trust in the new borrowing figures and whether the fiscal headroom can be delivered, then we will see a fair steepening of the gilt curve and that is going to result in a weaker sterling."
One currency the pound has been gaining on is the Japanese yen. Sterling hit a 16-month top of 205.71 yen on Thursday, with the Japanese currency under pressure across the board.
In contrast, the pound has been falling on the other traditional global safe-haven currency, the Swiss franc, hitting its lowest level last week since Britain's 2022 budget drama.
"The trade into the budget next week is going to be still to be short Sterling/Swiss," Broux said in a note.
Reporting by Ozan Ergenay in London; Editing by Alun John and Emelia Sithole-Matarise
Source: Reuters