Feb 6 (Reuters) - Sterling edged higher against the U.S. dollar on Tuesday after falling sharply a day earlier, as investors assessed the policy path of the British and the U.S. central banks.
The pound fell to its lowest level since mid-December on Monday as comments from Federal Reserve Chair Jerome Powell and strong economic data combined to boost the dollar.
It was up 0.1% at $1.2550, after hitting $1.25175 the day before, its lowest since Dec. 13.
Analysts argued that the Bank of England (BoE) was as cautious as the Federal Reserve about a quick easing of its monetary policy, adding that they expect sterling to consolidate around $1.25.
Investors scaled back bets on an early BoE rate cut on Friday, and gilt yields rose after robust U.S. payrolls data and comments on the policy outlook from BoE Chief Economist Huw Pill, saying the first cut "is still some way off".
Pill said late on Monday that a monetary easing was a question of when, not if.
Money markets are pricing an over-50% chance of a first rate cut in May by the Federal Reserve, according to the CME FedWatch Tool, and in June by the BoE.
Against the euro, the pound rose 0.16%, with a euro buying 85.54 pence.
"We do have a bullish profile for the EUR/GBP largely on the view that the BoE will cut more aggressively than the ECB," said Chris Turner, regional head for UK research at ING.
"Let's get the sterling positive event risk of the budget out of the way in early March, and then the market should be able to focus on the sharp drop in UK headline inflation through the second quarter, as well as a softer pound," he added.
Finance Minister Jeremy Hunt is mulling over possible tax cuts to boost economic growth, according to media reports.
(Editing by William Maclean)
