Sterling steady as traders await BoE, nervously watch midterms

Nov 3 (Reuters) - Sterling held steady against both the dollar and the euro on Tuesday, with traders nervous about placing large bets ahead of the US midterm elections while also calibrating positions ahead of the Bank of England's meeting on Thursday.

The midterms come at a tense time for markets, with a slump in AI-related shares causing investor unease, while traders are also watching the situation in the Gulf where a senior Iranian official told Reuters that Iran and the US remain far from a deal to end the war.

And that uncertainty kept market moves in check. 

The pound was flat against the dollar at $1.3414, and was at 83.35 pence per euro, a fraction firmer on the day, close to an 18-month high hit last week. 

The big domestic event of the week for British markets is the Bank of England meeting. 

The central bank's Monetary Policy Committee is expected to raise interest rates for the first time August 2023. The US Federal Reserve and European Central Bank have already been raising rates in a bid to prevent high energy costs spilling over into broader inflation. 

"We think the balance of risks has now shifted to the point where the MPC can no longer sit on its hands," said Henry Cook, Europe economist at MUFG. 

"UK inflation, already at 3.5%, is heading materially higher, the economy has outperformed expectations, and the labour market seems to have stabilised." 

Markets are pricing three further BoE rate rises next year in addition to a move this week, though many analysts think that is overdone. Cook expects just one more hike in February. 

Mark McCormick, chief FX strategist at BMO, is sceptical even of that. 

"This looks more like a one-and-done hike than the start of a fresh cycle ... We expect the BoE to push back against that pricing rather than validate it," he said, adding he also thinks the ECB is likely to raise rates less than markets are currently pricing. 

That means BMO is cautious for the pound against the dollar but still wants to sell the euro against the pound "as French political risk and weaker euro area growth reassert themselves". 

(Editing by Kevin Liffey)