LONDON: Sterling rose for a third consecutive day on Wednesday on hopes that Prime Minister Theresa May can avoid a no-deal Brexit though gains were capped before inflation data which might whittle down the probability of an interest rate hike next year.

Headline inflation data is expected to show a decline to 2.3 percent for the month of November from 2.4 percent previously and edging towards a 2 percent target in the coming years by the Bank of England.

A sharp fall in inflation might further weigh on market expectations of a rate hike. Money markets are pricing in an 80 percent probability of one interest rate hike next year.

The British pound gained 0.2 percent to $1.26661, moving further away from a 20-month low of $1.2477 hit last week. Against the euro, the pound was modestly weaker at 90.03 pence.

However markets would be wary of placing too much of an emphasis on economic data with the central bank repeatedly saying that the outcome of Brexit negotiations will be a key factor for the path of future interest rates.

May is yet to win the support of a deeply divided parliament for the deal she struck last month with European Union leaders to maintain close ties with the bloc with less than three months until Brexit.

“The government is playing a very hardball game, however, as it delays the Brexit vote until the New Year, which is curtailing the debate over May's plan and effectively giving little time for alternatives to be found," Scotiabank strategists said in a note.

Copyright Reuters, 2018