LONDON, Feb 16 Reuters Sterling steadied against the dollar and euro on Thursday after a deep slump a day earlier as Britain39;s softerthanfeared inflation eased tightening pressures from the Bank of England BoE.

The pound was about flat against the euro at 88.80 pence, after recording its biggest daily drop against the single currency in two months on Wednesday when data showed UK consumer price inflation CPI cooled to 10.1 last month, the lowest reading since September.

Against the dollar, sterling edged up 0.13 to 1.2054, after falling more than 1 versus the greenback on Wednesday.

The betterthan expected inflation figures weakened the pound amid boosted expectations that the BoE may be set to end its interest rate hiking cycle.

Money market is pricing in a 65 chance of a 25 basis points increase to the BoE bank rate in March , after which the central bank is expected to stop hiking rates.

Jane Foley, head of FX strategy at Rabobank, said the euro was holding onto the gains made against the pound on the back of the inflation report but much of the optimism for the slowing down in the inflation had been previously flagged by the BoE limiting the pound slump.

UK inflation data speaks to the cautious optimism noted in the remarks from BoE Governor Bailey earlier this month when he noted that price pressure may have turned a corner. Consequently, the market has priced out some of the previously projected policy tightening from the BoE which has undermine the pound,…