By Joice Alves
LONDON (Reuters) -Sterling fell by more than 1% on Friday and was set for a second consecutive week of declines against the U.S. dollar as Britain's gloomy economic outlook left investors on edge while strong U.S. inflation data boosted the greenback.
The pound fell below $1.24 after data showed that U.S. consumer prices accelerated in May, suggesting that the Federal Reserve could continue with its 50 basis point interest rate hikes through September to combat inflation.
The Bank of England is expected to raise interest rates next week for the fifth time since December, its steepest run of rate hikes in 25 years.
Prompting markets to bet on faster tightening by the BoE, British short and medium- dated government bond yields rose sharply this week after the European Central Bank signalled it would raise interest rates in July and September.
Financial markets are pricing in BoE rates hitting 2% by September and 3% by May 2023.
However, with Britain forecast to have the weakest economy in 2023 among the world's rich nations, sterling failed to gain support from hikes expectations.
"I don’t necessarily think the number of hikes priced for the BoE is necessarily reflective of what the Bank’s likeliest course of action is, therefore, it doesn’t provide much stimulus for the pound," said Simon Harvey, head of FX Analysis at Monex Europe.
"Conversely, higher expectations of the Fed funds rate are justifiable and are therefore propping up the dollar as it drives front-end Treasury rates higher," he added.
The pound slipped as much as 1.3% versus the dollar to $1.2339 at 1428, hitting its lowest in three weeks..
It edged 0.2% lower against the euro at 85.13 pence but was heading to its best week against the weakening single currency since April.
Shaun Osborne, chief FX strategist at Scotiabank, said markets only expect a 25bps hike from the BoE next week and "a quarter-point increase should not greatly impact the pound."
"Where the main risks lie for the pound is that the bank tees up a pause in its hiking cycle in coming months that would clearly oppose the view of markets that see a 50bps hike at the August or September decisions," he added.
(Reporting by Joice Alves, editing by Emelia Sithole-Matarise and Susan Fenton)