August 31, 2017 / 5:09 PM / a year ago

Sterling records worst month in 10 as Brexit uncertainty weighs

* Graphic: sterling and gilt yields

* Graphic: World FX rates in 2017

* Graphic: Trade-weighted sterling since Brexit vote

By Saikat Chatterjee and Jemima Kelly

LONDON, Aug 31 (Reuters) - Sterling slipped against the dollar and euro on Thursday and was on track to record its worst month since October, as uncertainty over Britain’s exit from the European Union and weak economic data weighed.

Investors appeared to ignore comments that could be considered supportive for the currency from Bank of England policymaker Michael Saunders, who said interest rates needed to rise soon.

Saunders, one of two BoE rate-setters who have voted recently for a rise in the bank rate, said the central bank risked being rushed into sharper rate hikes in future, potentially hurting growth, if it did not start to ease the economy off its near-zero rates now.

But investors broadly think rates will stay close to zero until there is more clarity on a Brexit deal. Some reckon that the BoE will try to talk up the currency in order to keep a lid on inflation, which has shot up this year as a result of the sharp falls in the pound since last year’s EU referendum.

“Brexit uncertainty continues to weigh on sterling, and if there is a protracted spell of weakness, then policymakers may come out to support the currency as it pushes up headline inflation,” said Thu Lan Nguyen, an FX strategist at Commerzbank AG in Frankfurt.

Sterling was down 0.3 percent at $1.2890 by 1630 GMT on Thursday and slipped the same amount against the euro, at 92.17 pence.

For the month, the pound fell 3 percent on a trade-weighted basis, its sharpest falls since October.

It was its fourth straight months of losses against the euro. Sterling hit an 11-month low against the single currency this week, but it has since recovered a little as the euro has weakened.

“Euro/sterling is participating to a degree in the broader euro weakness after the recent remarkable surge, with a sufficiently chunky selloff to suggest a more robust consolidation may have been set in motion,” said Saxo Bank’s head of currency strategy John Hardy.

Investors have their eye on the third round of Brexit negotiations, which started on Monday, with the European Union’s chief negotiator saying he was concerned at the slow progress of the talks.

The British government has laid out a series of position papers that have outlined compromises over some of the issues likely to block progress in talks this year, but EU officials say Britain needs to settle its divorce bill with the bloc before a trade agreement can be discussed. (Reporting by Saikat Chatterjee and Jemima Kelly; Editing by Larry King)

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