The pound edged up against the dollar on Wednesday, ahead of a monetary policy decision from the U.S. Federal Reserve and dropped against the euro, which staged its biggest daily fall against the pound in five months the previous day.

Sterling was up 0.1% against the dollar at $1.2913 and down 0.1% against the euro , which traded at 85.81 pence.

The euro tumbled by 0.7% against the pound on Tuesday, marking its largest one-day decline since February, after data showed economic growth is slowing across Europe as tighter credit conditions kick in.

However, a day ahead of a rate decision by the European Central Bank, few investors were overly willing to commit to pushing the euro much lower, given the expectation for the ECB to raise interest rates again and possibly signal more are in the pipeline.

The major driver for the currency market on Wednesday was the run-up to the Fed's decision on monetary policy later on.

Money markets show traders fully expect U.S. rates to rise by another 25 basis points from their current 5.00-5.25% range and to peak around 5.45% by November.

Expectations for what the Bank of England signals when it meets on Aug. 3 have shifted this month. Traders expect UK rates to rise to as much as 5.84% by next March, from 5.0% right now, but this is well below a peak of around 6.4% by May just two weeks ago.

Source : Reuters