Sterling steadies but declines against dollar for a fourth week

By Lucy Raitano

LONDON (Reuters) -Britain's pound steadied against the dollar on Friday, although it was set for a fourth consecutive week of losses after selling that pushed the currency to two-year lows.

Sterling was up 0.3% to $1.22340 at 1537 GMT, swinging back from modest losses earlier in afternoon trading, when it had been down 0.07% against the U.S. currency. The pound was down 0.04% at 85.08 pence against the euro.

The pound had fallen to a two-year low of $1.2165 on Thursday after data showed Britain's economy unexpectedly shrank 0.1% in March following a slump in car sales.

"We've had quite bad GDP data from March, and the stagflationary backdrop for the UK is not really great, then you've got tension boiling over in Northern Ireland over the Protocol," Kenneth Broux, European currency strategist at Societe Generale said.

Broux added that he would not read too much into any gains in the British currency.

Senior British politicians want to overhaul the agreement on trade between Northern Ireland and the United Kingdom that they signed up to in order to get a Brexit deal. They have warned they might have to take unilateral action.

As well as the resurrection of Brexit risks, the latest economic data has exacerbated concerns about a weakening growth outlook that could slow the Bank of England's rate-hiking cycle.

"The pound has been under pressure, the currency is still seen as a very useful stagflation hedge especially after the BoE’s May report the Bank of England that signalled the MPC’s concerns about stagflation in the UK," said Valentin Marinov, head of G10 FX research at Credit Agricole.

The pound has become the pressure valve of markets' stagflation fears, Marinov said, adding: "Different measures at the moment show that cable should be $1.26/7 not $1.20, meaning we are already pushing deeply into undervalued territory".

(Reporting by Lucy Raitano; Editing by Dhara Ranasinghe, Emelia Sithole-Matarise and Alexander Smith)