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Sterling slumps 0.5% vs euro ahead of UK GDP data

By Joice Alves

LONDON, Aug 11 (Reuters) - Sterling fell against the euro on Thursday a day ahead of gross domestic product (GDP) figures which are expected to show further signs of a weakening British economy.

The pound is one of the worst performers out of the G10 currencies this year, having fallen almost 10% against the U.S. dollar in 2022.

On Thursday, sterling was roughly flat against a weakening dollar on the back of softer-than-expected U.S. inflation data. Traders said the UK currency's fall against the euro gave a clearer picture of the state of the economy.

According to a Reuters poll of economists, UK GDP is expected to have shed 0.3% in the second quarter from a 0.4% growth in the first three months of the year.

"On the back of the U.S. CPI inflation release the market has reassessed the amount of Fed rate hikes that could be in the pipeline," Jane Foley, head of FX strategy at Rabobank in London said.

"The softer U.S. dollar has given cable some reprieve although expectations that tomorrow's UK GDP report will be soft is likely to ensure that many would-be GBP bulls remain cautious," she added.

Against the euro, sterling was down 0.5% at 84.70 pence at 1045 GMT, its lowest since July 26.

It was 0.1% lower on the day against the U.S. dollar at $1.2198, after a sharp 1.4% rise on Wednesday after the U.S. dollar inflation data was released.

Investors turned their focus this week to the energy crisis after reports Britain was planning organised blackouts over winter, while concerns around surging consumer energy debt also weighed on sentiment.

Political developments were also watched after reports that Liz Truss, the front-runner to succeed Boris Johnson as prime minister next month, would give ministers powers to override financial regulators, such as the Bank of England, if they hold back post-Brexit reforms.

BoE Governor Andrew Bailey said weakening the independence of regulators would undermine reforms, while BoE Chief Economist Huw Pill said that central banks are able to take tough decisions on monetary policy, in contrast to governments driven by short-term political pressures.

In its August meeting, the BoE warned of a recession by the end of the year that could last until 2024. Nevertheless, it raised its benchmark interest rates to 1.75% from 1.25%, the sixth hike since late 2021 and its biggest in 27 years in a attempt to smother surging inflation on track to top 13%.

(Reporting by Joice Alves; Editing by Andrew Heavens)

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