Sterling slips as U.S. budget, UK easing worries weigh

Fri Nov 30, 2012 7:23pm IST

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* Sterling slips after hitting one-month high vs dollar

* Euro, U.S. fiscal issue to dictate moves in sterling

* Events next week could help sterling break recent range

By Anooja Debnath

LONDON, Nov 30 (Reuters) - Sterling slipped from an earlier one-month high against the dollar and fell against a firm euro on Friday, weighed by worries about the U.S. budget and risks of more policy easing in the UK.

Market players said buying by an Asian central bank earlier in the session lifted the pound, but month-end demand for euros corporates and some European central banks, coupled with concerns about the UK economy, then pushed it lower.

The pound was down 0.1 percent at 1.6017 after slipping from an earlier high of $1.6062, its highest level since Nov. 2. Near-term resistance was at $1.6056, its 55-day moving average.

Sterling will be swayed by the euro's movements and more broadly by whether lawmakers can strike a budget deal in the United States.

House of Representatives Speaker John Boehner said on Thursday that talks on the fiscal dispute had not made substantial progress.

"The focus is really going to be on euro/dollar as it really drives sterling moves and I will be looking for more comments on the U.S. fiscal cliff," said Nawaz Ali, UK market analyst at Western Union Business Solutions.

The so-called "fiscal cliff", a raft of spending cuts and tax rises due to kick in early next year, threatens to derail U.S. and global growth and is keeping currencies like the euro and sterling under pressure.

Along with the euro, the pound typically falls during times of heightened concerns about the global economy.

The euro was up 0.2 percent against sterling at 81.02 pence, not far from a five-week high of 81.165 pence hit earlier on Friday.

"Euro/sterling will probably run out of momentum at around 81.20 pence," said Tom Levinson, currency strategist at ING.

A move above there could see it rise towards 81.60 pence but he warned any reemergence of euro zone debt worries could see investors resume buying sterling as an alternative to the euro.

STERLING MOVES

Strategists said there were a slew of events next week which would provide direction to the pound. Apart from the Bank of England and European Central Bank meetings on interest rates, the mid-year UK budget update would provide some clarity on the economic outlook.

Bleak economic data has kept the chances of monetary easing by the BoE, or quantitative easing (QE), alive and this is likely to cap any rallies in sterling against the dollar. QE is seen as negative for the pound as it increases its supply.

Traders said events next week had the potential to help sterling break the recent range of $1.5880-$1.6050

BoE Governor Mervyn King on Thursday flagged an "exceptionally challenging" environment in the UK economy, a factor likely to boost the case for a weaker pound to stimulate growth.

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