LONDON (Reuters) - The pound steadied on Friday as some calm returned at the end of a bruising week in which concerns about the UK's deteriorating economic outlook, the policy direction under a new prime minister and demand for dollars all hurt the British currency.
Sterling is on course for a weekly fall of nearly 1.5% versus the dollar, and next week could be volatile too as Britain's new prime minister will be announced on Monday, when the ruling Conservative Party's leadership contest concludes.
In August the pound suffered its worst monthly performance against the U.S. currency since October 2016 and some analysts are predicting it could test its all-time low of around $1.05 hit in 1985.
On Friday the pound rose 0.1% to $1.1551 after hitting $1.1499 on Thursday, its weakest since the market panic of March 2020 during the start of the COVID-19 pandemic.
Against the euro sterling weakened 0.2% to 86.31 pence.
Polls put Foreign minister Liz Truss ahead in the race to become Britain's new leader. She has based her campaign on promises to slash taxes but is yet to detail how she will tackle soaring energy bills. Some economists say her plans will stoke already-high inflation and force the Bank of England to raise interest rates even faster.
MUFG analyst Derek Halpenny said that with the pound falling the Bank of England, which meets on Sept. 15, may be persuaded to follow the likes of the Federal Reserve and hike interest rates by a more aggressive 75 basis points than the 50 bps currently expected.
"Hints of that next week would help stem pound selling and provide the potential for some recovery, but we believe that would only be temporary. Forced aggressive hiking into a weak economy to protect against FX-related inflation risks is not a favourable mix," he said.
"But more important will be the extent of Truss's plans on tackling the energy and cost of living crisis," he added.
A further worry for investors about a Truss premiership is the potential for renewed tension with the European Union over the border and trading arrangements for Northern Ireland, the only part of the United Kingdom that shares a land border with the EU.
(Reporting by Tommy Reggiori Wilkes; Editing by Simon Cameron-Moore)