LONDON, Oct 31 (Reuters) - The British pound was strengthening against a weaker dollar on Tuesday but still on track for its third straight monthly drop as traders looked ahead to the Bank of England's policy announcement on Thursday.

Britain's central bank is expected to keep interest rates unchanged at a 15-year high of 5.25% when it announces policy this week, amid signs that the labour market is cooling even as it faces an inflation rate more than three times as high as its target.

The British Retail Consortium said annual shop price inflation dropped to 5.2% from 6.2% in September, its weakest since August 2022, supporting the view that the BoE will refrain from policy changes at this meeting.

"The BoE won't hike this time around," said Dane Cekov, senior macro and FX strategist at Nordea.

Money market traders are betting that the BoE is finished with rate increases in this tightening cycle, with rate cuts priced towards the end of next year.

Most economists also said the BoE is likely to be done with tightening and will leave the Bank Rate at 5.25% later this week, a Reuters survey found.

By 1126 GMT, the pound was up 0.2% versus the dollar at $1.2190 but was still on track for a third consecutive monthly loss.

Sterling was last at 87.48 pence per euro, down around 0.3% on the day.

Against the yen, the pound was up 1.4%, on track for its biggest daily gain against the Japanese currency since July, after the Bank of Japan made only a small tweak to its yield curve control policy, sending the yen tumbling.

The BoJ maintained its -0.1% target for short-term interest rates and that for the 10-year government bond yield around 0% set under its yield curve control, but redefined the 1.0% limit as a loose "upper bound" rather than a rigid cap.

Markets were now on the lookout for potential intervention in the Japanese yen, which could have knock-on implications for other currencies.

"I think the only thing that is stopping the yen from being weaker is the threat of intervention from authorities," Nordea's Cekov said.

"Markets will continue to test how willing the Japanese government is to protect the yen."

Meanwhile, the dollar index, which measures the currency against six major peers including the pound and the yen, was last down 0.2% at 105.95, but in close proximity to an 11-month high of 107.34 hit earlier this month.

(Reporting by Samuel Indyk; Editing by Angus MacSwan)