By Samuel Indyk
LONDON (Reuters) - The British pound dropped to a 10-week low on Friday as investors rein in expectations of where they think the Bank of England's interest rate might peak after recent soft activity data.
S&P Global's flash purchasing managers' index (PMI) for August, released on Wednesday, showed business activity contracted, indicating the UK economy was on course to shrink in the third quarter and prompting markets to scale back tightening bets.
Sterling was last down 0.1% at $1.2591, having earlier dropped to its lowest level since June 13 at $1.2560. The euro stood at 85.72 pence, also down 0.1%.
"Weaker than-forecast retail sales last week and dismal PMI this week have raised concerns over the health of the UK economy and recession fears," said Fiona Cincotta, financial market analyst at City Index.
The dollar was broadly stronger, also rising against the yen and euro, before Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde take the stage at the Jackson Hole Symposium later on Friday.
BoE Governor Andrew Bailey is skipping the event, with Deputy Governor Ben Broadbent representing the central bank at the Wyoming meet-up on Saturday.
"His remarks are scheduled for tomorrow, so we'll need to wait for Monday to see any impact on sterling," said ING FX strategist Francesco Pesole.
"The recent volatility in the BoE peak rate expectations on the back of data releases means the return of some BoE comments after a long period of silence can definitely move the market."
Markets are still pricing in with near certainty that the BoE will raise its key interest rate for a 15th straight meeting in September to 5.5%, but with only around 60 basis points worth of tightening still priced, markets think a peak at 6% is now a long shot.
"We have seen a paring back of terminal rate expectations and even the prospect of hitting 5.75% is becoming increasingly less likely," said Jeremy Stretch, CIBC Capital Markets head of G10 FX strategy, adding that sterling could fall towards the $1.2470 region in coming weeks.
Meanwhile, data showed British consumers' mood perked up in August as lower inflation made individuals less downbeat about the outlook for their personal finances, but overall sentiment remained fragile.
The GfK consumer sentiment indicator rose to -25 in August from a three-month low of -30 in July, its biggest rise since April although still below the average of -10 for the survey, which has been running since 1974.
(Reporting by Samuel Indyk, additional reporting by Dhara Ranasinghe; Editing by Kirsten Donovan)