By Harry Robertson
LONDON, Sept 21 (Reuters) - The pound fell slightly on Thursday as traders waited for a finely balanced Bank of England interest rate decision later in the day.
Sterling was down 0.28% at $1.2309. Meanwhile, the euro was 0.23% higher against the pound at 86.55 pence.
The pound fell 0.39% against the dollar on Wednesday after data showed British inflation cooled more than expected in August, causing traders to rapidly reel in bets that the Bank of England will hike rates again.
Pricing in derivatives markets on Thursday morning in London showed traders think there's a roughly a 60% chance of a 25 basis-point rate hike to 5.5% - an outcome which was seen as effectively a done deal only a month ago.
Investors are divided over what to expect from the Bank. Goldman Sachs, Deutsche Bank and Nomura said they now think the BoE will leave rates on hold on Thursday, having previously expected a hike.
Chris Turner, head of markets at ING, said in a note to clients that the Dutch bank thinks the BoE will still raise rates by 25 basis points.
"A hike would provide GBP/USD with some much-needed support," Turner said. "If not, the path to $1.21 would be open."
He said the pound would likely slip against the euro as well if the BoE pauses, with the common currency likely rising to 87 pence.
Part of the pound's fall on Wednesday was down to a rise in the dollar after the U.S. Federal Reserve kept interest rates on hold at 5.25% to 5.5% but signalled that rates would stay high for a longer period than investors had been expecting.
The dollar index, which tracks the currency against six peers, was up just under 0.1% on Thursday at 105.49, after rising 0.26% on Wednesday.
Data on Thursday showed Britain increased its public borrowing in the first five months of the tax year.
Public sector net borrowing, excluding state-owned banks, totalled 69.6 billion pounds ($85.7 billion) in the April-August period. That was 19.3 billion pounds more than a year earlier but remains well below the amount expected by official fiscal forecasters. (Reporting by Harry Robertson Editing by Gareth Jones)