Sterling trims drop after BoE hike, China's data sends dollar higher

Sterling trimmed declines after the Bank of England raised interest rates for the 12th consecutive time, while the safe-haven dollar rose on Thursday as more evidence of weakness in China's post-COVID recovery clouded the outlook for the global economy.

The BoE raised its key interest rate by a quarter of a percentage point to 4.5% on Thursday as expected by a Reuters poll, taking borrowing costs to their highest since 2008 as it seeks to curb the fastest inflation of any major economy.

The UK central bank no longer predicts recession, but it now expects inflation to be slower to fall than it had hoped, mostly due to unexpectedly big and persistent rises in food prices.

Sterling edged up 0.2% to $1.2597 from a 0.4% fall before the BoE decision.

"The change in the underlying assumptions was slightly on the hawkish side and they upgraded GDP (gross domestic product) and inflation expectations and also stressed tightness in the labour market," said Peter Schaffrik, Global Macro Strategist at RBC Captial Markets in London.

The U.S. dollar rose against the euro and other major currencies following the release of Chinese data showing consumer inflation almost flatlined last month.

It had slid this week on the back of slowing U.S. inflation, which bolstered confidence that the Federal Reserve was done hiking interest rates.

The slowing Chinese inflation, suggesting more stimulus may be needed to boost a patchy post-COVID economic recovery, came on the foot of data earlier in the week showing an unexpected decline in imports.

The onshore yuan slipped as low as 6.9427 per dollar, a level last seen on March 10.

The dollar index measuring the greenback against a basket of six major peers including euro and sterling, rose 0.4% to 101.81.

"The market is trying to assess which economy is going to slow down quicker, and is undecided how to read the latest data," said Rodrigo Catril, senior FX strategist at National Australia Bank.

"U.S. CPI was encouraging, and should be dollar negative, but China CPI is a reminder of the ongoing issues there."

Money market traders currently lay odds of 5% on a quarter point hike in June, and a 95% probability of a pause. Three quarter-point cuts are priced in by the end of this year.

The euro also got a hit from the Chinese data, slipping 0.5% to a three-week low of $1.0929.

The Swedish crown fell 0.6% to 10.2790 per dollar.

The Aussie dollar slipped 0.7% to $0.6731, pulling away from Wednesday's 2-1/2-month high of $0.6818. New Zealand's dollar fell 0.5% to $0.6339, after briefly touching a three-month high of $0.6384.