December 3, 2014 / 2:53 PM / 3 years ago

Sterling at 3-week high vs euro, Osborne's upbeat Autumn Statement helps

(Updates after UK budget statement, fresh details)

By Anirban Nag

LONDON, Dec 3 (Reuters) - Sterling hit a three-week high against the euro on Wednesday, after a survey showed Britain’s dominant services sector grew much faster than expected in November and finance minister George Osborne gave an upbeat budget statement.

In his Autumn Statement, Osborne raised near-term growth forecasts and while the government will miss deficit-reduction targets, Britain will sell fewer bonds in 2014/15 than previously forecast, sending gilt futures and the pound higher.

Sterling was up 0.25 percent at $1.5680, pulling away from Monday’s low of $1.5585 -- the pound’s weakest since early September 2013. It was also helped by a drop in the dollar after the U.S. ADP jobs report missed forecasts.

“First impressions suggest the Autumn Statement should be positive for domestic consumption with income taxes, stamp duty, inheritance and air duty cuts,” said Josh O‘Byrne, currency strategist at Citi.

“Taken together with the quite impressive services PMI figure this morning, we’ve seen a cautious rebound in the pound with BoE (rate) hike expectations edging slightly forward to January 2016.”

The pound rose 0.8 percent against the euro, with the single currency down at 78.565 pence -- its lowest since Nov. 12. The euro was under pressure ahead of a European Central Bank meeting on Thursday.

Policymakers in the euro zone are grappling with declining inflation expectations, which are likely to prompt them to ease policy sooner rather than later.

Back in Britain, investors drew comfort from the services sector purchasing managers’ index (PMI), which highlighted the contrasting prospects for Britain and the euro zone economies.

The closely watched Markit/CIPS services PMI rose to 58.6 in November, beating forecasts in a Reuters poll, after falling sharply to 56.2 in October.

UK rate forecasts have been pushed back dramatically over the past few months, with some now not expecting a hike until early 2016. That pushback of expectations has weighed on the pound, sending it down almost 9 percent since it hit a six-year high near $1.72 in July when many had expected a hike this year.

Sterling has also been hurt by growing political uncertainty ahead of next year’s general election.

“The far more important question facing the UK is whether there will be an effective government of any colour after May 2015,” said Christopher Mahon, investment manager at Barings Asset Management.

“How markets react to the prospect of a far less stable UK government may end up as one of the defining stories of 2015.” (Editing by Louise Ireland and Susan Fenton)

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