Market News

BY Canan Sevgili

LONDON (Reuters) -Sterling edged lower against a stronger dollar on Thursday as investors looked ahead to a policy decision from the Bank of England, which is widely expected to leave rates on hold but could unveil changes to its bond sales programme.

The pound fell 0.13% to $1.36125 after touching its highest since July 2 at $1.3726 in the previous session.

The U.S. dollar firmed, extending its rebound after plunging to a 3-1/2-year low earlier in the week, as markets adjusted to the Federal Reserve's measured stance on further interest rate cuts.

Attention was on the BoE, which is expected to keep rates steady at 4%, while slowing the annual pace of its 100 billion pound ($136.10 billion) government bond sales in response to recent volatility in debt markets.

"We think the BoE meeting that concludes Thursday will be hawkish on rates but may well surprise dovish on its QT plans for the next year," Krishna Guha, vice chairman of U.S. investment bank Evercore ISI, said.

The BoE could well slow its quantitative tightening (QT) programme, under which it sells its holdings of government bonds, by more than expected to 60 billion pounds, or skew its sales towards shorter-dated gilts, he added.

Data on Wednesday showed British inflation running at an annual 3.8% in August, reinforcing expectations that further rate cuts are unlikely in the near term.

"Main focus will instead be on any changes to their forward guidance and the QT decision," Deutsche Bank said in a note.

Deutsche Bank chief UK economist Sanjay Raja sees a "material risk" that policymakers abandon their "gradual and careful" language on the downward path for Bank Rate.

Raja expects the BoE to trim its quantitative tightening envelope from 100 billion pounds to about 70 billion pounds, with a range of 65-75 billion pounds.

Sterling held steady against the euro, which traded at 86.74 pence.

($1 = 0.7348 pounds)

(Reporting by Canan Sevgili; Editing by Amanda Cooper and Andrew Heavens)