Sterling steady after UK inflation data and ahead of Fed

By Canan Sevgili

LONDON, Sept 17 (Reuters) - Sterling held steady against the dollar as UK inflation data reinforced expectations that the Bank of England will keep rates unchanged this week, in contrast to the U.S. Federal Reserve, which is expected to cut rates later on Wednesday.

The pound GBP=D3 was little changed at around $1.3638, having hit its highest level since early July on Tuesday against a broadly weaker dollar.

The BoE is widely anticipated to keep interest rates at 4% when it meets on Thursday. Official figures on Wednesday showed inflation at an annual 3.8% in August, in line with a Reuters poll, reinforcing market expectations that further rate cuts are unlikely soon.

"In line inflation print is unlikely to move the needle on the BoE's interest rates decision tomorrow," said Emma Mogford, fund manager at Premier Miton Monthly Income Fund.

"Consumers and businesses will have to wait a bit longer for an interest rate cut."

Economists polled by Reuters expect one more rate cut by the end of the year.

High inflation remains a challenge for Britain's government as well as the BoE. Finance minister Rachel Reeves said last week that fellow ministers should focus on helping the central bank to slow price growth, as well as boosting economic growth.

Sterling edged up against the euro EURGBP=D3, which slipped 0.07% to 86.89 pence.

"The good news is that August inflation data has corrected some of the upside surprise seen last month, but the bad news is that CPI may have a little further to go before hitting its peak," said Deutsche Bank chief UK economist Sanjay Raja.

Focus meanwhile turned to the U.S. Federal Reserve, which is expected to lower its benchmark interest rate by 25 basis points to a 4.00%-4.25% range later on Wednesday.

The European Central Bank kept rates unchanged last week, highlighting that big central banks are moving in different directions.