Sterling steadies ahead of UK budget

© Reuters. Pound and U.S. dollar banknotes are seen in this illustration

By Ritvik Carvalho

LONDON (Reuters) – Sterling steadied against the dollar on Wednesday and gained against the euro ahead of the announcement of Britain’s budget for the coming fiscal year, which is expected to prop up the economy as it prepares for a reopening from lockdowns.

The pound was flat at $1.3967 by 0841 GMT, after falling to its lowest in 2-1/2 weeks on Tuesday. It was 0.1% higher to the euro at 86.45 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 restrictions.

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.

“We’re not expecting too many surprises when the Chancellor takes to his feet to deliver one of the most widely leaked budgets in history,” said Robert Alster, CIO at wealth manager Close Brothers Asset Management.

“The key focus will clearly be continued support for the economy, as we navigate our way out of lockdown. Businesses will be listening closely for the approach to business rates and VAT cuts in the coming months.”

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.

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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 currency, which only last week hit its highest in 2-1/2 years.

Analysts remain bullish, although in the long-term, investors may focus on Britain’s debt.

“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 GBP 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.”

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