(Updates at 0940 GMT)
Britain's pound fell to its lowest level in three weeks on Thursday, as traders waited for a knife-edge Bank of England decision later in the day.
Sterling GBP=D3 slid 0.7% to its lowest since July 10 at $1.2764.
It also fell against the euro: the euro zone's single currency EURGBP=D3 was up 0.33% at 84.48 pence.
Pricing in derivatives markets showed traders think there is a roughly 62% chance the BoE lowers rates when it announces its decision at 1100 GMT on Thursday. That is similar to the odds on Wednesday and up from around 58% at the start of the week
0#BOEWATCH .The Bank of England has held rates at the current 16-year high since August 2023, but inflation has now fallen back to the 2% target from above 11% in 2022.
Some BoE policymakers have pointed to still-high inflation in wages and the services sector as a reason for caution, however.
Joe Tuckey, head of FX analysis at broker Argentex, said investors have in recent weeks begun to question their bets that sterling will continue to rally, as their BoE expectations have shifted. The pound hit a one-year high above $1.30 in mid-July.
"I think a lot of this sterling downside is just positioning unwind into what is such a cliff-hanger of a BoE meeting," he said.
Currency traders were bracing for swings in the pound, according to a measure of implied overnight volatility derived from options prices, which hit a one-year high on Wednesday and rose again on Thursday.
"It's such a finely poised assessment of whether they'll cut or hold today," Tuckey said.
The pound's slide was also having an impact on other currencies on Thursday, said Lee Hardman, currency analyst at MUFG.
"The market has been pricing in a higher probability of the Bank of England cutting rates after the dovish Fed policy update overnight," he said. "That has obviously brought the pound under pressure against the dollar."
The U.S. Federal Reserve left rates on hold on Wednesday but opened the door to a reduction in September. Investors will be looking closely at July's U.S. jobs figures for any steers on Fed policy.
The U.S. dollar index =USD was up 0.3% at 104.36 on Thursday, while the euro EUR=EBS was 0.4% lower at $1.0782.
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