Sterling rises versus dollar, but fiscal concerns still in focus

By Stefano Rebaudo

(Reuters) -Sterling edged up against the dollar on Monday as investors paused following Friday's selloff driven by fiscal concerns.

The dollar edged down as investors await speeches from Federal Reserve officials throughout the week that could provide further clues on the U.S. rate outlook.

Analysts highlighted several factors weighing on the British currency, including vulnerabilities in the UK labour market, the potential need for further fiscal consolidation in the Autumn budget, and broader global cyclical risks.

Britain's borrowing has shot past the official forecasts that underpin the government's tax and spending plans, compounding the already big challenge facing finance minister Rachel Reeves in her November budget.

Sterling rose 0.2% to $1.3496, after hitting $1.3453, its lowest level since September 5. The dollar rose 0.61% versus the British currency last week.

Analysts argued they no longer view UK monetary policy developments as a key driver of the pound in the coming weeks and months, while a slower-than-expected pace of Bank of England rate cuts may still offer limited support against the euro.

The single currency dropped 0.05% against the British currency at 87.09 pence per euro, after rising 0.78% last week.

“While the euro is managing to shrug off a political and budget crisis in France and while the yen has not been too shaken by political uncertainties in Japan, the pound is more vulnerable to poor domestic news due to the UK’s current account deficit,” said Jane Foley, senior forex strategist at Rabobank.

Investors also await data from the UK PMI on Tuesday.

“With inflation still to peak and budget uncertainty there is scope for downside here and the services PMI looks too strong for us,” said Callum McLaren-Stewart, UK economist at Citi.

“The manufacturing PMI is weak on all fronts and unlikely to meaningfully pick up in the coming months.”

(Reporting by Stefano Rebaudo; editing by Sharon Singleton)