Sterling at 1-week high against dollar ahead of US CPI 

Oct 14 (Reuters) - The British pound rose to a 1-week high against the dollar on Wednesday as traders awaited a US inflation report that could influence the monetary policy path.

Sterling was up 0.1% at 1.3268 per dollar by 1023 GMT, touching its strongest level since October 7. The currency also rose to a fresh 16-month high against the euro and was last trading at 84.34 pence as higher oil prices and concerns about France's public finances weighed on the euro.

Investors are awaiting the release of US inflation data, which is expected to show consumer prices surged in September, driven by rising gasoline and food costs. Financial markets assign a roughly 22% chance of a rate hike at the Federal Reserve's October 27-28 policy meeting, CME's FedWatch Tool showed.

Focus was also on developments around the UK government's upcoming budget announcement. UK finance minister John Healey is expected to pay for new initiatives in this month’s budget with higher taxes or spending cuts rather than more borrowing, the Financial Times reported on Wednesday.

The Iran war has put additional pressure on Britain's public finances and left Healey with less headroom after meeting fiscal rules, according to the FT report, which also said the finance minister is expected to let the headroom act as a "contingency fund."

"We continue to think the market is under-pricing fiscal risk ahead of the Budget on October 28th, with 10-year gilts above 5.4% and headroom thin, so we retain our bearish bias into month-end," analysts at Monex Europe said in a note.

"For today, cable will follow the dollar’s reaction to CPI; an in-line print supports a push towards 1.33, but we would look to fade sterling strength."

The IMF backed Britain's fiscal strategy, urging it to "stay the course" rather than accelerate deficit reduction. Despite lower debt levels than most of the largest advanced economies, British government borrowing costs are the highest in the Group of Seven and last week touched their highest since 1998 as part of a global bond selloff. British government bond yields slipped on the day.

Meanwhile, Bank of England Chief Economist Huw Pill, who has voted for a quarter-point interest rate hike in recent months, said he was more sceptical about market pricing of four increases to borrowing costs by the BoE over the next year.

Investors are pricing in a near certain chance of a BoE rate hike at its November meeting followed by three more increases by September 2027. Revisions to the UK's August GDP data will be released on Thursday.