By Amanda Cooper

LONDON (Reuters) – The pound is set for its biggest weekly loss since January, pressured by weak UK economic data and a rising dollar

Economic Context

Britain's economy unexpectedly contracted in September, with growth slowing significantly in the third quarter, as reported on Friday.

Currency Performance

Sterling remained at $1.26795, around its lowest level since May, and is on track for a 2% decline this week, marking its largest loss since January.

Impact of U.S. Policies

President-elect Trump has pledged to impose hefty tariffs on imports from major trading partners while cutting domestic taxes and easing regulations on various sectors. The expected outcome is an increase in U.S. inflation and potential growth, boosting the dollar's value against the pound.

Yearly Performance

For the first time since July, sterling is down 0.4% against the dollar this year. Earlier in 2024, it had been the strongest major currency, driven by expectations that UK interest rates would decrease slower than those in the U.S.

Federal Reserve and Bank of England

As the Federal Reserve seems poised to cut rates slowly, the dollar may appear more appealing to traders. Money markets indicate that the Bank of England may cut UK rates to around 2% by next December, compared to the Fed's projected 3.84%.

Roberto Cobo, a strategist at BBVA, suggested that if the UK's economic data continues to show weakness, the Bank of England may increasingly focus on stimulating growth.