(Oct 21 Reuters) Sterling edged down against the dollar on Friday, hurt by expectations that Britain's economy is likely to suffer from a hardline stance by the European Union in negotiations on the country's exit from the bloc.
British Prime Minister Threresa May, who is in Brussels to attend her first EU summit since Britain's vote to leave the bloc in June, tried to reassure EU leaders over Brexit but was told by French President Francois Hollande to prepare for tough talks.
Sterling was 0.15 percent lower at $1.2235, having fallen to a low of $1.2213 on Thursday after tough comments from the president of the European Council, Donald Tusk.
It has fallen nearly 20 percent since the June vote with losses accelerating in the past few weeks after May raised the spectre of a "hard" Brexit where the government will negotiate for an exit that favours tighter immigration controls over free trade, likely curbing foreign investment needed to fund Britain's huge current account deficit.
"Investors have started to price in the impact of a hard Brexit on the economy and the current account driven by the political stalemate between the UK and the rest of Europe. In addition, there is concern that an inflation surge will prevent the BOE from supporting the economy,' said Nick Kounis, head of macro research at ABN-Amro.
Sterling's slide has sent inflation expectations soaring, driving investors to reassess chances of further easing by the Bank of England this year. It also lead some analysts to say that foreign investors were demanding an extra premium before buying gilts.
Britain's 10-year gilt yield was little changed in early trade at around 1.09 percent, hold below roughly four-month highs hit on Monday at 1.22 percent.
The pound, though, outperformed the euro, rising 0.2 percent to trade at 88.96 pence per euro, its highest since Oct. 7. The euro was hurt by European Central Bank chief Mario Draghi's comments as he quashed speculation that it was considering how to wind down bond purchases.
"The euro is still licking its wounds after yesterday's ECB announcement where Draghi made a forceful statement against any tapering," said analysts at RBC Capital Markets.
(Reporting by Anirban nag; Editing by Toby Chopra)