Sterling weak near five-week low versus buoyant euro

Mon Dec 3, 2012 3:43pm IST

* Market focus on UK mid-year fiscal statement on Wednesday

* UK PMI shows manufacturing slows less than expected

By Philip Baillie

LONDON, Dec 3 (Reuters) - Sterling held near a five-week low against the euro on Monday and could weaken further as investors shun the pound in anticipation of a gloomy mid-year fiscal statement from the government on Wednesday.

The euro strengthened 0.1 percent against sterling to 81.16 pence, close to a five-week high of 81.325 hit on Friday when German lawmakers approved an aid deal for Greece.

Sterling, though, edged up against the dollar to $1.6050 with traders citing demand for the pound to meet dividend payments. Offers to sell the pound were also cited above $1.6060 with traders awaiting the mid-year statement for cues.

Finance Minister George Osborne's "autumn statement" to parliament will give an indication of the UK's fiscal position and likelihood of meeting debt targets. On Sunday he said Britain would take longer to deal with its debt pile and that a recovery will be sluggish.

Economists speculate the independent Office for Budget Responsibility may lower growth forecasts and could also predict a target to have public sector debt falling as a proportion of national output by 2015/16 will be missed.

That in turn would endanger Britain's triple-A credit rating, which has provided sterling much support in the past as investors bought UK gilts while fleeing the euro zone crisis.

"Unless the Office for Budget Responsibility does surprise us on those forecasts, the risks are slightly weaker around the statement," said Paul Robson, currency strategist at RBS.

The euro was also helped by unwinding of short euro positions as yields on euro zone government bonds fell and Greece said it would conduct its bond buy-back programme to trim the country's ballooning debt.

The pound barely reacted to better-than-expected UK manufacturing data. The UK manufacturing PMI data came in at 49.1, above expectations but below 50, indicating contraction.

"The nonchalant reaction of sterling reflects that the markets are not in the frame of mind to expect any policy amendments in the near term," said Simon Smith, chief economist at FxPro.

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