(Reuters) - Sterling edged higher against the dollar and

fell versus the euro on Tuesday, as traders expect the Bank of

England to maintain its rate guidance at this week's policy

meeting.

The BoE is widely expected to cut its key interest rate to

4% from 4.25% on Thursday and to lower it once more before the

end of the year, despite consumer price inflation rising to

close to double the central bank's 2% target in June.

Traders priced in over a 90% chance of an easing move this

week and 86 bps of rate cuts by December 2026.

The pound was up 0.05% at $1.3290 against the dollar

.

The greenback rose against the euro and the yen, but

remained within striking distance of Friday's lows.

"Given the stagflationary character of the data, we expect

'gradual and careful' to stay as the main forward guidance, with

a highly uncertain vote split," said Citi.

"We expect this situation to remain until the autumn budget,

after which contractionary tax increases, in our base case,

should pave the way for sequential rate cuts."

Britain borrowed more than expected in June, adding to

speculation about the need for new tax hikes by finance minister

Rachel Reeves later this year.

"We suspect that it (the BoE) will (maintain its gradual and

careful rate guidance), although any change here would almost

certainly be greeted by a bout of pound weakness," said Enrique

Diaz-Alvarez, chief economist at Ebury.

The British currency was last up 0.3% at 86.85 pence per

euro. It fell to 87.69 pence last week, its weakest against the

single currency since May 2023.

Yields on UK gilts snapped a 5-day losing streak on Tuesday,

with the 10-year up 2.5 bps at 4.53%.

"Risks are two-sided: a faster or more pronounced loosening

of the labour market could warrant cumulative or larger cuts,

whereas sticky underlying (services) inflation and only gradual

signs of labour-market slack could extend the pause between cuts

beyond current expectations," said Nikolay Markov economist at

Pictet Asset Management.