By Ritvik Carvalho
LONDON - Sterling dipped against the dollar on Tuesday with potential volatility expected by analysts ahead of Thursday's Bank of England meeting and the Scottish parliamentary elections.
The BoE is expected by some analysts to announce tapering, or a reduction in the pace of its bond purchases at its meeting.
"On the BoE, sterling could get a lift given that the market is hyper-sensitive to the word 'tapering'," said Chris Turner, global head of markets at ING.
Meanwhile, the Scottish National Party (SNP) is expected to win a majority in Scottish parliament, which some see as a risk for Britain.
The SNP has pledged to call for a second Scottish independence referendum, although permission to do so will need to be granted by the UK government in London.
"Although the Scottish election may bring back negative headline news about another Scottish independence referendum, we don't think this should have an overly negative impact on sterling," ING's chief EMEA FX strategist Petr Krpata and developed market economist James Smith said in a note.
"This is because (a) a referendum could be years away rather than months; (b) as we observed with the Brexit referendum, the risk premium started to be built into the pound only six months ahead of the event; and (c) the first Scottish referendum in 2014 did not translate into a material build-up of GBP risk premium."
Sterling was 0.2% lower to the dollar by 0827 GMT at $1.3878. Against the euro it rose 0.2% to 86.58 pence.
(Reporting by Ritvik Carvalho; editing by Philippa Fletcher)