LONDON, Jan 25 (Reuters) - Sterling fell against the dollar and the euro on Wednesday after data showed British manufacturers unexpectedly lowered their prices in December, which suggested inflation may be easing, ahead of next week's Bank of England policy meeting.
The pound was down around 0.37% to $1.22950, and down 0.15% against the euro at around 88.40 pence .
The declines come after data on Wednesday showing Britain's manufacturers unexpectedly reduced their prices in December by the most since April 2020.
The news that UK factories reduced prices is likely to take some pressure off Bank of England policymakers, who must consider how far to hike interest rates in the battle to bring down inflation.
Meanwhile recession fears remain at the forefront of traders' minds, after private-sector economic activity was seen falling at its fastest rate in two years in January, with businesses blaming higher Bank of England interest rates, strikes and weak consumer demand.
The soaring cost of debt was also reflected in data on Tuesday showing Britain's government borrowed more last month than in any December since monthly records began 30 years ago.
"The data yesterday was not good and showed a somewhat diverging outlook compared to the EU, where things appear to be looking a little brighter," said Stuart Cole, head macro economist at Equiti Capital.
"The bigger picture is today's PPI numbers which have shown inflationary pressures to be receding and which have cast doubts on how far the BoE will ultimately raise interest rates too."
The market is expecting the BoE to hike interest rates for the tenth time since late 2021 as it battles inflation.
Markets are currently placing a 75% chance of a 50 bps rate hike at the BoE meeting. The Federal Reserve and the European Central Bank both hold policy meetings next week.
Reporting by Lucy Raitano; Editing by Alexander Smith