Sterling hits fresh 2-1/2-month low versus euro, falls against dollar

By Stefano Rebaudo

Jan 14 (Reuters) - The British pound was poised to record a sixth consecutive day of decline against the dollar on Tuesday and hit a fresh 2-1/2-month low versus the euro as concerns about Britain's fiscal sustainability continued to weigh.

Heavy government bond supply has put pressure on British asset prices, while inflation concerns have driven bond yields higher on both sides of the Atlantic.

Investors will closely watch U.S. inflation readings, which could provide further clues on how stubborn U.S. price pressures are. Producer price figures are due later on Tuesday, with consumer prices on Wednesday.

The dollar hovered near its highest level in over two years as traders scaled back wagers on U.S. rate cuts in 2025 after strong economic data.

The British currency GBP=D3 dropped 0.2% to $1.2175. It hit $1.2097 on Monday, its lowest level since November 2023.

Yields on 10-year gilts GB10YT=RR dropped one basis point to 4.88% after jumping last week amid worries about the government's plans to sell more debt and inflationary pressures in the United States.

UK consumer price figures, due on Wednesday, will also be in the spotlight. Analysts argued that sticky inflation could lead investors to price in less Bank of England (BoE) rate cuts in a move which could spell more trouble for the UK market.

Higher yields usually reflect a strong economy and attract capital inflows, strengthening the currency. In this case, they may force the government to cut fiscal spending to meet its fiscal rules, potentially weighing on future growth.

Britain's finance ministry said last week it would maintain "an iron grip" on public finances in response to a two-day selloff in debt markets.

"But the UK economy is weak, persistent inflation keeps monetary policy excessively tight, while higher yields squeeze the government's fiscal policy space," said Paul Mackel, global head of forex research at HSBC, arguing that these themes will continue to swirl and leave the pound exposed.

The single currency rose 0.4% to 84.26 EURGBP= pence, its highest level since Nov. 1.

Analysts pointed out that UK budget constraints include a stability rule, whereby day-to-day spending must be matched by revenues and an investment rule that public sector net financial liabilities will decline as a proportion of gross domestic product (GDP).

Investors will closely watch the outcome of a 4-billion-pound auction of 10-year gilts on Wednesday to gauge investor demand.

Graphic: World FX rates in 2023 http://tmsnrt.rs/2egbfVh

Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv

(Reporting by Stefano Rebaudo; Editing by Alexander Smith)

((stefano.rebaudo@thomsonreuters.com))