Sterling set for fourth monthly loss as UK economy softens

By Amanda Cooper

LONDON (Reuters) - The pound headed for a fourth monthly loss on Friday, increasingly under pressure from investor concern about the outlook for the British economy, following January's bond market turmoil and in light of weakening UK data.

Sterling has fallen 0.7% in January, bringing losses since September's 2-1/2-year high to more than 7.5%.

Earlier this month, a selloff in global government bonds hit the UK market particularly hard, sending long-term gilt yields to their highest in decades, heaping pressure on finance minister Rachel Reeves.

Yields have since retreated and sterling has recovered some stability, but a recent run of macro data has pointed to an economy that is slowing rapidly, with unemployment rising, falling consumer spending and weakening business activity.

Mortgage lender Nationwide said on Friday showed the UK housing market lost some momentum in January, as prices rose by just 0.1% compared with December, but otherwise remained resilient.

By Friday, the pound was set for a 0.4% weekly decline against the dollar, but a 0.5% gain versus the euro.

"With nothing else on the docket, and no central bank speakers of note, we expect sterling to track euro moves through today’s trading, skewing risks in favour of further downside against the dollar," Monex Europe strategists said in a note.

The pound was last flat on the day against the dollar at $1.242 and up 0.12% against the euro at 83.57 pence.

The Bank of England is expected to deliver another quarter-point rate cut next week and may indicate it has room to lower borrowing costs further, if inflation continues to moderate.

Adding to the sense of tension in the currency market was a deadline on Saturday from President Donald Trump for Canada and Mexico to stop the flow of illegal migrants and the drug fentanyl into the United States, or face tariffs of 25% on their imports.

He also warned BRICS member countries from replacing the dollar as a reserve currency or face 100% tariffs on their U.S.-bound exports.

The risk of a full-blown trade war has curbed some investor enthusiasm over the strength of quarterly corporate earnings so far.

(Reporting by Amanda Cooper; Editing by Gareth Jones)