Sterling drops against firmer dollar as markets price in a hawkish Fed

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Sterling eased 0.2% to $1.331, pinned near its lowest in two weeks and extending losses after a 0.7% drop in the last session.

The dollar index was up for the second straight day after data showed US consumer prices increased by more than expected in October and marked a third consecutive month of upside surprises.

The US currency firmed against most others, as traders fully priced in a 25-basis-point interest rate hike in December, with slim chances of an outsized 50-bp hike also on the cards, according to the CME FedWatch Tool.

Another potential headwind to the pound could be the rise in crude oil prices on Wednesday, given the UK's status as a net energy importer. Brent crude futures were 1.4% higher on the day.

Investors will be watching for Britain's latest gross domestic product data, due on Thursday. A Reuters survey of economists forecasts 0.7% quarter-on-quarter growth in the third quarter, which would be a pick-up from the previous period.

The Bank of England raised interest rates last Thursday for the first time in over three years in an almost unanimous decision. Analysts have noted that hawkish expectations from the British central bank have supported the pound lately.

"There is a shift now among central bankers to being slightly more hawkish, because there's a much greater concern that if they don't nip inflation in the bud, then we could see the second-round inflation really start to take effect," said Rory Glass, an FX dealer at Marex in London.

Forecasts from a leading academic think-tank released late on Tuesday said the BoE will not succeed in returning inflation to target before 2030, driven by second-round effects on wages caused by the Iran war.

Meanwhile, the pound held steady at 83.6 pence against the euro after falling for the last four sessions, the longest such stretch since early September.