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.

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