Pound resilient but at risk after gloomy UK budget statement

Wed Dec 5, 2012 8:52pm IST

* FinMin says UK will miss debt, growth targets

* May raise concerns about QE, UK rating downgrade

* Pound off earlier one-month low versus euro

* PMI data shows UK services sector growth slows

By Philip Baillie

LONDON, Dec 5 (Reuters) - Sterling edged up from one-month lows against the euro on Wednesday after a gloomy UK budget statement which traders said was in line with expectations.

But forecasts from finance minister George Osborne that Britain would miss its debt-reduction and growth targets left the currency looking vulnerable.

Analysts said the poor UK economic outlook might revive prospects of more monetary easing by the Bank of England and increase the risk of a credit agency cutting the UK's top-notch rating, both of which would be negative for sterling.

The euro was down 0.2 percent against the pound at 81.18 pence, easing back following Osborne's autumn budget statement having earlier hit a one-month high of 81.45 pence.

Some analysts said the euro could soon test its late October peak of 81.65 pence.

"Sterling has not reacted much after the statement - it has been caught up in the crossfire in other currency pairs," said Adam Cole, global head of FX strategy at RBC Capital Markets.

The pound was steady against the dollar at $1.6094, though traders said reported offers ahead of $1.61 may stem its rise. It remained relatively close to a one-month peak of $1.6131 hit on Tuesday, with traders reporting buying of the pound from a supranational.

Earlier in the session, the pound barely reacted to a survey showing Britain's service sector grew at its slowest pace in nearly two years in November. The purchasing managers' index was below forecasts but still just above the 50 level, signaling growth.

QE RISK

The lower growth forecasts could open the way to more bond purchases by the Bank of England, which meets on Thursday, said Audrey Childe-Freeman, head of foreign exchange strategy at BMO Markets in London.

The BoE's Monetary Policy Committee is expected to hold interest rates at 0.5 percent on Thursday and keep quantitative easing at 375 billion pounds, but there is a chance it may opt for more QE next year.

Citibank economist Valentin Marinov said in a note to clients that markets will be wary ahead of a review by credit agency Moody's of the country's sovereign rating in early 2013.

"I still expect that the UK will be able to maintain its AAA rating and sterling should continue to serve as a safe haven proxy for the euro. A potential downgrade, not my central case, could see sterling some of its attractiveness vis-a-vis the single currency," he said.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Adani Project

Adani Project

Australia approves Adani's $16 bln Carmichael coal project  Full Article 

India-U.S. Talks

India-U.S. Talks

Kerry to woo Modi's India, but quick progress unlikely  Full Article 

Paring Debt

Paring Debt

Jaiprakash to sell hydro plants to Reliance Power  Full Article 

Nifty Falls

Nifty Falls

The broader index hits lowest in nearly a week on profit taking  Full Article 

Mideast Conflict

Mideast Conflict

U.N. Security Council calls for humanitarian ceasefire in Gaza  Full Article 

Market Eye

Market Eye

Foreign investors prefer Indian cyclicals, utilities - Macquarie  Full Article 

Debt Investment

Debt Investment

India's FII debt limit hike credit-positive, says Moody's  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage