Sterling pauses as traders already second guessing November budget

By Joice Alves

LONDON (Reuters) -The pound steadied on Thursday, struggling to rise against a weakening dollar, as traders have started to assess the impact the UK November budget will have on the economy and sterling.

While the dollar came under broad pressure after the U.S. government shut down over funding, adding to investor caution around U.S. assets, sterling steadied against the greenback at 1.3478, after touching a one-month low on Wednesday.

It fell 0.13% against the euro to 87.15 pence.

UK finance minister Rachel Reeves' annual budget is due in eight weeks and she will try to stay on course for her fiscal targets although higher taxes would weigh on an already fragile economy.

There is "a signal of markets starting to price in some GBP risk premium ahead of the UK budget. While the (budget) announcement is only on 26 November, it’s widely expected that many bits of the budget will be released to the media in the weeks before," said ING strategist Francesco Pesole.

Reeves is expected to raise taxes again, having ordered employers to pay around 25 billion pounds ($33.38 billion) more in social security contributions in her first budget last year.

"Sterling looks set to consolidate near 1.35, but conviction is weaker. UK fiscal dynamics are front and centre as the Autumn Budget looms," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

"Higher borrowing costs are narrowing fiscal headroom, raising the risk of tax hikes, spending cuts — or both. That prospect doesn’t exactly bolster appetite for the pound," she said.

In the meantime, a Bank of England monthly survey on Thursday said British businesses have the weakest hiring intentions since 2020 and expect the fastest consumer price inflation since early 2024.

Investors are also focused on how the central bank will react to inflation fears. Money markets are pricing in two BoE rate cuts next year.

Britain's inflation rate had become persistently high, although that did not mean further interest rate cuts were completely off the table, said interest rate-setter Catherine Mann.

(Reporting by Joice Alves; Editing by Susan Fenton)