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Sterling steady as gloomy data highlights recession risks

British pound coins are seen in front of displayed stock graph in this illustration

By Amanda Cooper

LONDON (Reuters) - Sterling steadied on Thursday, but headed for its first weekly loss against the dollar in a month, after data this week underscored the task facing the Bank of England in controlling inflation without damaging an economy already in recession.

A series of business confidence and activity surveys this week have painted a picture of an economy under pressure from double-digit inflation and squeezed consumers and corporates.

Sterling has lost 0.1% in value against the dollar this week so far, its first weekly decline against the U.S. currency since the week ending December 23. But it's still on course for its fourth-successive monthly rally against the greenback, with a gain of 2.5% in January, marking its best performance in the first month of the year since 2019.

This is more a function of what investors believe about the likely path of interest rates in the United States and Britain. Money markets show traders believe the Federal Reserve has, at most, half a percentage point more in hikes to go before rates peak just shy of 5%.

Markets show the Bank of England meanwhile, has almost a full percentage point to go before UK rates top out around 4.4% by August.

"Alarming figures released over the last week have acted to sap sterling of the confidence and optimism given to it by the news of recession dodging 0.1% month-on-month growth in November," CaxtonFX strategist David Stritch said.

"Figures suggested that the number of British business at risk of going bust has increased by 33% in a year. With rumbling strike action and no news on Northern Ireland, sterling traders will be left wondering when the good times will come again."

Sterling was last flat against the dollar at $1.2389, and was broadly steady against the euro at 88.01 pence.

The BoE meets next week for the first time this year. Traders are widely expecting a half-point rise in interest rates to 4.00%, which would be the most since late 2008.

Deutsche Bank senior economist Sanjay Raya said he expected the BoE's Monetary Policy Committee (MPC) to raise rates to 4% in its "last 'forceful' hike" in the tightening cycle.

"With inflation past the peak, and forward looking data continuing to point to both sluggish growth and easing price pressures, the MPC could opt to slow the pace of hikes sooner rather than later," Raya said.

The euro has been a standout gainer lately and the pound has lost almost 0.5% against the European currency so far this week.

As with the dollar, it's mostly as a result of expectations for the European Central Bank, particularly in light of the number of officials that have reiterated the central bank's determination to bring inflation down to its 2% target.

(Reporting by Amanda Cooper; Editing by Sharon Singleton)