Sterling's early NorAm gain evaporated after above forecast U.S. ISM non-manufacturing and JOLTS reduced Fed rate cut expectations, pushing GBP/USD to session lows below 1.25 ahead of a slew of U.S. data this week which may inform markets on Fed policy direction, which has taken a less dovish turn in recent weeks.

With limited UK data until tier 2 UK output data next week, U.S. releases are the focus, including jobless claims on Wednesday and payroll data on Friday, to gauge U.S. inflation expectations, and by extension, Fed policy.

JOLTS job openings came in above forecast on Tuesday and ISM non-manufacturing PMI also exceeded expectations, though the sub-index for services jobs eased.

Futures pricing indicates virtually no chance for a Fed rate cut on Jan. 29 and just below 50% odds for a move in March, which should keep the dollar buoyant as data rolls in.

STIR futures are pricing a 68% chance for a BoE cut in early February, which may exert downward pressure on the pound heading into the Feb. 6 MPC meeting.

Inflation data, for both the UK and U.S. on Jan. 15, may be the tie-breaker for GBP/USD traders.

With the current central bank bias tipped more dovish for the BoE, sterling is likely to remain anchored near trend lows and may test the Jan. 2 low at 1.2353 should the UK central bank cut in February.

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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)

((paul.spirgel@thomsonreuters.com))