By Harry Robertson
LONDON (Reuters) -Sterling slipped on Thursday after a sharp drop the previous day, as investors waited for Friday's highly significant U.S. jobs data.
The pound was 0.66% lower against the dollar at $1.1244, after dropping 1.4% on Wednesday. The euro was last up 0.38% against sterling at 87.67 pence.
Gyrations in the dollar have caused choppy waters in global currency markets this week.
Traders are grappling with whether the U.S. Federal Reserve will maintain its aggressive pace of interest rate hikes as it tries to curb inflation - which has sent the dollar surging this year - or whether concerns about slowing economic growth mean it will "pivot" and raise borrowing costs more slowly.
The greenback suffered its biggest one-day drop in more than two years on Tuesday after some weak economic data raised hopes that the Fed might slow down on rate hikes.
Yet it rebounded a day after, with the bounce continuing on Thursday. The dollar index was last up 0.52% to 111.52, not too far from its 20-year high of 114.78 touched last week.
U.S. non-farm payrolls employment data, due out Friday, will give traders a clearer sense of the state of the country's economy.
Kit Juckes, macro strategist at Societe Generale, said dollar strength and doubts about government policy were weighing on sterling on Thursday.
"As the dollar regained its bid, sterling is still the easiest European currency for people to sell against the dollar. There are still concerns about government credibility, about fiscal policy."
Britain's currency plunged to a record low of $1.0327 on Sept. 26 and bonds tumbled after new finance minister Kwasi Kwarteng unveiled a plan to slash taxes, especially for the rich, and to sharply increase borrowing.
Yet the currency bounced back after the market chaos forced the Bank of England to start buying bonds again and Kwarteng U-turned on some of his tax plans.
Ratings agency Fitch on Wednesday followed Standard & Poor's in lowering its outlook on British government debt to "negative" from "stable".
Investors made a mistake in thinking the Fed would let up on rate hikes, said Michael Brown, foreign exchange strategist at Caxton. Brown said he expected more trouble ahead for sterling, with the dollar likely to stay strong.
"Overall it does look pretty clear that the market has put in a near-term top around $1.15, and I think cable (sterling-dollar) is likely to struggle to break above that level in the near future," he said.
A Reuters poll of almost 60 analysts found that investors expected the pound to fall to $1.09 in a month's time and stand at $1.16 in a year.
(Reporting by Harry Robertson; Editing by Alex Richardson and Toby Chopra)