LONDON, Oct 28 (Reuters) - The British pound slid against the dollar on Friday but was still set for its third consecutive weekly gain, its longest positive streak since February.
After hitting a record low against the dollar of $1.0327 in September, the pound has staged a recovery after the formation of a new British government and as the dollar has softened on expectations that the Federal Reserve might begin to slow the pace of monetary tightening.
However, that recovery stalled on Friday and by 0933 GMT the pound was down 0.3% against the dollar to $1.15295. For the week, the pound was still up 1.9%, its biggest weekly jump since Sept. 30.
Against the euro, the pound was down 0.2% at 86.39 pence.
"With Rishi Sunak as prime minister, markets see a safe pair of hands," said Stuart Cole, head macro economist at Equiti Capital.
"Sunak and (finance minister Jeremy) Hunt have injected an element of confidence back into the UK as far as international investors are concerned and sterling has been a beneficiary of that."
However, with the Bank of England (BoE) expected to further hike interest rates while the economy is slowing and with ongoing issues concerning EU trade and the Northern Ireland Protocol, Cole was cautious on the outlook for the pound.
"I think these issues are going to be very hard to fix and will likely weigh on sentiment towards the UK for a long time to come," Cole said.
Analysts were now turning their focus to next Thursday's BoE meeting.
Markets had been pricing in a jumbo hike of over 150 basis points at the meeting after former prime minister Liz Truss's administration announced a series of unfunded tax cuts that the Bank of England said would require a "significant monetary policy response".
Under the previous government, markets also priced in a terminal rate of around 6.25%.
But since Truss's resignation and the installation of Sunak as prime minister, markets have lowered their expectations for BoE tightening as the new government looks set to reverse almost all of the previous administration's tax cuts.
Traders are now placing around a 90% chance of a 75 basis point rate hike at the meeting, according to data from Refinitiv, with some expecting a smaller half point rise.
"We think the chances of a 50bp hike from the BoE are greater than the market currently prices - and that is a sterling negative," said Chris Turner, ING global head of markets in a note.
The BoE will not be able to incorporate the new fiscal update into its forecasts next week as Hunt has pushed back the statement to Nov. 17. He had previously planned to make an announcement next Monday.
Reporting by Samuel Indyk Editing by Gareth Jones