The British pound fell against the U.S. dollar on Tuesday but remained on track for its first monthly gain of 2022 even as Britain's murky growth outlook continued to weigh on sentiment.

At 0850 GMT, the pound was 0.32% lower against the dollar at $1.26140.

Despite the weakness, sterling remains well off its mid-May lows when it touched its lowest level since March 2020.

Earlier this month the Bank of England raised interest rates to their highest level since 2009, as inflation soared to a four-decade high and warned that Britain risks a recession.

"There is a fairly negative psychology behind the pound related to poor expectations around growth," said Jane Foley, head of FX at Rabobank London.

"Relative to other countries in the G7 those very forecasts suggested the UK economy is unlikely to perform well over the next couple of years and that's the underlying reason for sterling’s poor performance".

Sterling regained ground on the back of strong labour market and CPI data, but focus remains on soaring inflation and how the central bank will manage future potential rate hikes.

Foley said the UK was getting the worst of both worlds when it came to inflation triggers.

"It is situated in Europe so it deals with the brunt of the natural gas price hike, and that even predates the war," she said. "So we’ve had high gas prices that the U.S didn't have, and unlike the Eurozone there have also been signs of wage inflation.”

Money markets have been readjusting their rate hike expectations lower in recent weeks..

As expectations for Federal Reserve rate hikes were revised down, the dollar index weakened from its mid-May peak, providing another lift for sterling which is influenced strongly by movements in the dollar.

Against the euro, sterling was 0.06% higher at 85.095 pence.

(Reporting by Lucy Raitano; Editing by Kirsten Donovan)