Sterling on course for monthly rise against dollar but fiscal risks linger

By Jaspreet Kalra

(Reuters) -Sterling slipped against the dollar and euro on Friday amid concerns over Britain's fiscal position, but remained on track for a monthly gain against the U.S. currency.

The pound was 0.3% lower on the day at $1.3464 and was down about the same amount against the euro.

Over the month, though, sterling was on course to rise about 2% against the dollar, while declining slightly against the euro.

An influential think tank recommended on Friday that the UK government could begin taxing banks based on their Bank of England reserves.

Weakness in the pound coincided with a decline in British bank shares and an uptick in benchmark Gilt yields on Friday.

British bank shares were the worst performers on the STOXX 600 index of large European companies, while the yield on the benchmark 10-year Gilt rose 3 basis points to 4.73%.

"All in all, it's highlighting the potential downside risks for the pound from the government's fiscal position," said Lee Hardman, senior currency analyst at MUFG.

A pullback in expectations for rate cuts by the Bank of England and buoyant economic data have supported sterling this month. Analysts reckon that fiscal developments are likely to stay in focus for the currency going ahead.

British finance minister Rachel Reeves is widely expected to increase taxes again after raising them on employers in her first budget last year.

Elsewhere, the dollar was steady against a basket of major currencies at 97.99 as investors awaited the U.S. PCE price index report, the Fed's preferred inflation measure, later on Friday for cues on the future path of monetary policy.

Money markets are currently pricing in an 85% chance of a U.S. rate cut next month.

(Reporting by Jaspreet KalraEditing by Mark Potter)