LONDON: Sterling rose against the euro and fell versus the dollar on Thursday as traders assessed the Bank of England's next move after data showed British inflation hit a more than nine-year high in August, fuelling expectation of a rate increase.

The BoE expects inflation to hit a peak of 4% this year. The strong reading for inflation could reinforce expectations that the central bank is set to tighten monetary policy quicker than the European Central Bank or the U.S. Federal Reserve.

Consumer prices in Britain rose by 3.2% in annual terms last month, the biggest monthly jump in the annual rate in at least 24 years.

ING analysts expect cable to settle around $1.38-$1.39 in the near term, as they argued that the lifting of energy price caps in October could potentially send the October and November readings above 4%.

Britain's energy regulator said it would increase its cap on the most widely used tariffs by about 12-13%.

"Should UK growth/inflation data come in on the strong side, the market's search for the BoE terminal rate could keep GBP supported," said Chris Turner, Global Head of Markets at ING in a note to clients.

Sterling steadies near 5-week highs after labour market data

A poll from Reuters found that investors believed the BoE would raise borrowing costs by the end of 2022. The latest inflation numbers brought forward these expectations to mid-2022.

Versus the dollar, sterling edged 0.2% lower at $1.3812 at 0840 GMT, off the 5-week high of $1.3913 touched earlier this week, with Asian stock losses also weighing on sterling.

"The correction in GBPUSD is a function of the weak performance across Asian bourses, the slide is proving to impact risk sensitive crosses including cable," said Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets.

Sterling was 0.15% higher versus the euro at 85.25 pence, not far from the 3-week high hit on Tuesday.