Sterling set for first monthly rise since September

By Amanda Cooper

LONDON (Reuters) - The pound eased on Friday as nervy investors flocked to the dollar in light of growing pessimism over the outlook for the U.S. economy as President Donald Trump's tariffs are about to come into force.

That said, sterling was still heading for its first monthly rise since September, driven less by optimism over the UK economy and more by the prospect of UK rates taking longer to fall than those elsewhere.

Sterling was down 0.2% on the day at $1.259, having risen 1.6% in February, the most in a month since September's 1.9% gain.

Traders expect both the Federal Reserve and the Bank of England to deliver around two rate cuts this year, with a growing chance of a third. They currently believe U.S. rates will end the year at 3.73%, compared with 3.8% in Britain, according to the interest-rate futures market.

The difference is starker with the European Central Bank, which is expected to cut euro zone rates at least three more times before the year is out, which would leave rates below 2%.

The euro has also been under broader pressure after Trump threatened to apply a 25% tariff to European Union exports of cars and other goods. The possibility of U.S. duties on EU goods, in addition to those on Mexico, Canada and China, has been on the cards for some time, but now appears to be closer.

This week, the euro has fallen to its weakest against the pound since mid-December, having lost over 2.5% since Trump took office on January 20.

On Friday, it was roughly flat on the day at 82.56 pence.

British Prime Minister Keir Starmer visited Trump in Washington for the first time on Thursday to discuss a range of topics, including peace in Ukraine, as well as European spending on defence and tariffs.

The UK is less exposed to the risk of tariffs than the EU, given that it boasts a trade surplus with the U.S. and most exports are in the form of services.

Trump and Starmer said they had discussed a trade deal and the U.S. president suggested Britain could be spared.

"Sterling could continue to outperform in the short run, particularly against the euro and riskier currencies, although a lot is already priced in," BBVA strategists said in a note.

The next risk event for currencies is the release of the U.S. personal consumption expenditures index (PCE), which reflects broad consumer price pressures and could prove key in setting expectations for where U.S. interest rates may head in the first half of the year.

(Reporting by Amanda Cooper; Editing by Andrew Cawthorne)