By Iain Withers
LONDON (Reuters) -Sterling dipped against the dollar and euro on Friday, as weak business activity and retail data kept the currency on the back foot and traders tapered bets on future interest rate hikes after the Bank of England held rates the previous day.
British companies endured a much tougher September than most economists expected, according to a Purchasing Managers' Index (PMI) survey on Friday, which showed its lowest score since the pandemic lockdown of January 2021.
The preliminary reading for the services sector dropped to 47.2 from 49.5 in August, further below the 50 dividing line between growth and contraction.
Separately, British retail data showed consumer spending partially recovered in August after a rain-soaked July - growing 0.4% month-to-month - but narrowly missed economist forecasts.
"It's a story of weak growth for the UK," said Lee Hardman, senior currency analyst at MUFG. "Whether we go into a recession remains to be seen."
The pound was last down 0.3% at $1.22540 and was on track for around a 1% weekly decline. The currency had weakened to its lowest since March on Thursday to $1.22305, after the BoE left rates unchanged at 5.25%.
The euro, meanwhile, gained 0.2% versus the pound to 86.87 pence.
Markets have reined in bets for more rate rises from the BoE after the central bank's Monetary Policy Committee narrowly voted 5-4 to not increase borrowing costs for the first time since December 2021.
Pricing in derivatives markets showed traders' average bet was that rates would rise to 5.33% by early 2024, down slightly from Thursday and below 5.42% before the BoE decision.
(Reporting by Iain Withers; Editing by Amanda Cooper and Varun H K)