By Harry Robertson
LONDON, Oct 6 (Reuters) - Sterling edged lower on Thursday after a sharp drop the previous day, as investors waited for Friday's highly significant U.S. jobs data.
The pound was 0.2% lower against the dollar at $1.1296, after dropping 1.4% on Wednesday. The euro was last up 0.25% against sterling at 87.55 pence.
Gyrations in the dollar have caused choppy waters in global currency markets this week.
Traders are particularly grappling with whether the U.S. Federal Reserve will maintain its aggressive pace of interest rate hikes as it tries to curb inflation - which sent the dollar surging this year - or whether concerns about slowing economic growth mean it will "pivot" and raise rates 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, but rebounded a day after.
This bounce continued on Thursday, with the dollar index last up 0.28% to 111.23, not too far from its 20-year high of 114.78 touched last week.
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.
"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.
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 highly controversial 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".
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.
The analysts were divided about whether sterling would reach parity against the dollar by the end of the year, with 18 respondents saying the chance was low but 17 saying it was high. (Reporting by Harry Robertson; Editing by Alex Richardson)