LONDON: Sterling fell on Friday against the US dollar and was set for a second consecutive week of declines as Britain’s gloomy economic outlook left investors on edge.

The pound slipped 0.35% versus the dollar to $1.2454 pence, not far from a three-week low touched earlier this week.

Financial markets are pricing in Bank of England rates hitting 2% by September’s policy meeting and 3% by May 2023, up from 1% now as central banks battle surging inflation.

“Right now we would favour the dollar over sterling and could see sterling/dollar breaking down to 1.2350 next week,” ING analysts said in a note to clients.

Britain’s political risks, economic fears keep sterling under pressure

“The fact that sterling money markets still price a further 175bps of Bank of England tightening by year-end goes to show that investors struggle to buy into the idea of a pause anywhere,” they added.

Sterling was little changed versus the euro at 85.04 pence but was heading to its best week against the weakening single currency since April.

The euro weakened this week after the ECB ended a long-running stimulus scheme on Thursday and signalled it would deliver its first interest rate hike since 2011 next month, followed by a potentially larger move in September if inflation does not cool down.