Sterling edged higher against a weakening dollar and dropped versus the euro on Thursday, with investors focused on the Bank of England's policy path and the economic outlook.

The pound jumped versus the greenback the day after U.S. data showed services industry growth slowed further in March, while a measure of prices paid by businesses for inputs dropped to a four-year low, which bodes well for the inflation outlook and increases the chances of quick rate cuts by the Fed.

Sterling rose by 0.05% at $1.265 versus the greenback on Thursday after hitting a fresh one-week high at 1.2667.

It dropped 0.12% against the euro at 85.74 pence per euro.

"Our concerns are the point at which this favourable backdrop of low volatility and strong cross-border flows begins to turn," said Kamal Sharma, a forex strategist at BofA.

"At that point, we see genuine risks of a more sizeable retrenchment in GBP."

Recent data showed that "the deficit of the balance of payment is consistent with the long-term average, but net portfolio and investment flows are weaker than the long-term average," he argued.

Investors were also focused on the sterling cross against the Swiss Franc after the Swiss National Bank surprised markets by cutting rates a couple of weeks ago.

The pound jumped from 1.089 against the Swiss franc in early February to 1.1485, its highest since June 2023.

The GBPCHF spot has reached our target and faces a significant technical resistance level of around 1.15, said Dean Turner, economist at UBS. "This should limit (but not rule out) further upside potential from here."

He mentioned the possibility of Europe or the UK entering a deeper or more protracted recession as risk factors against this outlook.

Economic data showed on Thursday that British companies' expectations for selling prices and wage increases in the year ahead were cooling in March, while the British economy looked on track to exit recession.

"Similarly, a blue sky economic scenario with the BoE holding on to high rates for longer could result in a continued rally," UBS' Turner added.


(Reporting by Stefano Rebaudo; editing by Sharon Singleton)