Sterling wilts after UK budget update

Sterling fell on Wednesday, extending losses after UK finance minister Jeremy Hunt unveiled a series of tax cuts and other measures to boost growth in his autumn budget, but forecast a far more sluggish economic outlook than previously expected.

Sterling fell on Wednesday, extending losses after UK finance minister Jeremy Hunt unveiled a series of tax cuts and other measures to boost growth in his autumn budget, but forecast a far more sluggish economic outlook than previously expected. Hunt said gross domestic product is expected to grow by 0.7% in 2024, compared with the expansion of 1.8% forecast in the previous outlook in March from the Office for Budget Responsibility, Britain's fiscal watchdog.

The OBR also said UK economic output would grow by 1.4% in 2025 and by 1.9% in 2026 - weaker than its previous forecasts of 2.5% and 2.1% respectively. The pound was last down 0.4% on the day at $1.2487, but analysts said this was more a function of the dollar's strength following an upbeat weekly read of the U.S. labour market, rather than down to UK-centric factors.

"If you're looking at cable, it's trading below $1.25. But that is lot to do with the dollar move. Initial jobless claims came in much lower, triggering some dollar buying," Francesco Pesole, FX strategist at ING, said. Against the euro, the pound was down 0.14% at 87.16 pence.

"I didn't see many surprises in the budget. You could speculate that the tax cuts potentially have some inflationary connotations along the line, so you could argue for a higher-for-longer stance (on interest rates) by the Bank of England, although that probably contributed already to sterling outperforming the euro in the past two sessions," Pesole said. Hunt, who is seeking to boost the fortunes of Prime Minister Rishi Sunak's struggling Conservative Party ahead of an election expected next year, announced big increases in welfare payments and the state pension.

Britain's economy has struggled with high inflation and the new OBR forecasts showed the consumer price index was expected to rise by 2.8% next year, up from the March forecast of 0.9%. On Tuesday, the pound hit a 10-week high against a weaker dollar, as BoE Governor Andrew Bailey reiterated the central bank's stance that interest rates did not need changing.

Meanwhile, the dollar rebounded from a 2-1/2 month low on Wednesday following publication of minutes from the U.S. Federal Reserve's last meeting, which hinted that current rates could persist for some time. "There's been some profit-taking in long dollar positions ahead of the long weekend (in the U.S.), and the dollar softened in the early part of the week, but it's run out of steam in the last 24 hours," Colin Asher, senior economist at Mizuho Corporate Bank, said earlier in the day.

(Editing by Mark Potter and Gareth Jones)

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)