Sterling eases ahead of BoE rate decision this week

LONDON (Reuters) - The pound eased modestly on Monday, ahead of a policy meeting by the Bank of England this week at which the central bank is not expected to cut interest rates, but might telegraph the likely timing of the first drop.

Political turmoil in France last week rattled risk appetite and sent investors fleeing from French assets and the euro which fell 0.6% against sterling last week.

By Monday, the euro had recovered some stability, rising 0.1% against the pound to 84.46 pence.

Against the dollar, the pound has fared less well, falling 0.6% last week, in its largest weekly slide in two months. Sterling was last down 0.1% at $1.2674.

Recent data has shown inflation in the United States is not slowing as quickly as many had anticipated, while the Federal Reserve has said it sees only one rate cut this year.

Meanwhile, UK headline consumer inflation is falling towards the BoE's 2% target and markets are increasingly convinced the central bank, which meets on Thursday, will deliver two cuts this year, with close to a 90% chance of rates dropping to 4.75% by December.

The UK consumer price index (CPI) is due on Wednesday and is expected to show the headline rate rose by 2.0% in May, compared with April's 2.3% increase. Much of that drop is a function of household energy bills falling sharply, and BoE policymakers are far more focussed on wage growth and service-sector inflation.

Data last week showed British wages picked up more quickly than forecast.

This week's CPI report is expected to show services CPI rose at an annual rate of 5.6% in May, from April's 5.9%.

"Wednesday/Thursday this week should deliver a double-header of negative news for the pound. Here, UK May services CPI should drop sharply on Wednesday and be followed up a day later with tweaks to the BoE policy statement which hint at an August rate cut," ING strategist Chris Turner said.

(Reporting by Amanda Cooper; Editing by Andrew Heavens)