Sterling on track for weekly fall, outlook clouded by fiscal risks

By Jaspreet Kalra

(Reuters) -Sterling steadied after dipping to a two-week low against the dollar on Friday as traders pared wagers on a rate cut by the U.S. Federal Reserve next month.

Sterling was flat against the dollar at $1.3416 after touching its weakest level since August 7. It was slightly higher on the euro at 86.46 pence to the common currency.

It was on course for a 0.9% decline for the week, reversing course after gaining over the previous two weeks on the back of a hawkish repricing of the Bank of England's monetary policy path and upbeat economic data.

While better than expected business survey data and a comforting public borrowing update released on Thursday helped buoy the pound this week as well, analysts remain cautious heading into the autumn budget announcement.

"Until we know what's in the budget, sterling could be subject to some headwinds," said Jane Foley, head of FX strategy at Rabobank.

"It's still going to be difficult for the chancellor to avoid significant tax hikes in order for the Labour government to meet its spending commitments through the next fiscal year," Foley said.

The tax hikes could dent recently improved consumer confidence, presenting a headwind to growth, she said.

The benchmark 10-year gilt yield on Friday rose to its highest level since May 29 and was last up four basis points at 4.7660%.

Meanwhile, the dollar was a touch firmer against a basket of peers at 98.71.

Investors trimmed rate cut wagers ahead of an eagerly anticipated speech from Fed Chair Jerome Powell scheduled for 1400 GMT.

Money markets are currently pricing in a 73% chance of 25 basis point rate cut next month, down from 85% a week earlier, per CME's FedWatch tool.

(Reporting by Jaspreet Kalra; Editing by Joe Bavier)