Sterling steadies ahead of UK budget

LONDON (Reuters) – Sterling steadied against the dollar on Wednesday and gained against the euro before the announcement of what is expected to be an expansive budget designed to prop up the economy as Britain prepares for a reopening from lockdowns.

The pound was 0.1% higher at $1.3979 by 1127 GMT, after falling to its lowest in 2-1/2 weeks on Tuesday. It was 0.2% higher against the euro at 86.41 pence.

In a budget speech at 1230 GMT, finance minister Rishi Sunak will promise to do “whatever it takes”, including a five-month extension of a huge jobs rescue plan, to steer the economy through what he hopes will be the final months of COVID-19 restrictions.

“Overall, the additional fiscal support announced should underscore the constructive outlook for GBP for 2Q, with further fiscal help facilitating the economic rebound and making the pound the outperformer in the G10 FX space,” strategists at ING said in a note to clients.

“We expect sterling/dollar to breach the $1.50 level in 2H21 and dips below $1.40 should be faded.”

Sterling is the best performing G10 currency this year, up about 2% versus the dollar as investors bet the speed of Britain’s vaccination programme will enable a faster reopening of its economy, which suffered its worst annual contraction in 300 years.

Sunak has already racked up Britain’s highest borrowing since World War Two and he will turn to the bond markets again in his budget speech, saying the task of fixing the public finances will only begin once a recovery is in sight.

“The question is how Rishi Sunak will balance the need for short-term support while addressing the long-term problem of the deficit,” said Robert Alster, CIO at wealth manager Close Brothers Asset Management, noting speculation over tax rises.

“As things stand, the budget isn’t expected to have a particularly notable effect on the markets, but investors will be keeping a watchful eye on how Rishi Sunak chooses to steer the nation’s finances in the coming months.”

Relief over a last-minute Brexit trade deal signed with the European Union last year and a Bank of England that has pushed back market expectations of negative interest rates has also been beneficial for the pound, which last week hit its highest in 2-1/2 years.

Traders will also focus on a speech at 1600 GMT by Silvana Tenreyro, a member of the Bank’s rate-setting committee.

“Ms. Tenreyro represents the more dovish wing at the Monetary Policy Committee and will likely reiterate her support for sub-zero policy rates,” said Valentin Marinov, head of G10 FX research at Credit Agricole.

“To the extent that adds to the headwinds for the UK rates and yields, the pound could struggle to perform.”

Marinov added that the pound is already looking overbought and overvalued and this should leave is vulnerable to corrective moves to the downside.

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