British pound firms ahead of this week's budget update

By Yadarisa Shabong

(Reuters) - Sterling climbed on Monday ahead of British finance minister Rachel Reeves' spring budget update later this week and as data earlier in the day showed that business activity in the UK's huge services sector picked up this month.

The British pound rose 0.45% to $1.2973. It also gained against the euro, with the shared European currency 0.16% lower at 83.625 pence per pound.

Businesses in Britain's huge services sector reported a pickup this month, according to a survey that offered some comfort to Reeves ahead of a challenging speech on the economy and the public finances this week.

Britain's Office for Budget Responsibility is expected to announce a sharp downgrade to the UK's economic growth this year which, along with higher borrowing costs, is likely to force Reeves to cut her plans for spending increases in the coming years.

Reeves said on Sunday she would stick to fiscal rules despite global turmoil, raising the prospect of thousands of public sector job cuts in this week's budget update which is likely to include further savings.

"The whole point from the UK Treasury of... headlining a lot of the measures that are going to be announced on Wednesday, is engineered so that there won't be too many surprises for sterling and for UK assets at the spring statement," said Jane Foley, head of FX strategy at Rabobank.

The Bank of England is watching closely for the impact of the increase in employers' social security contributions.

Over the past weeks, the British currency's move has largely been driven by swings in the dollar and the euro given news on tariffs and Germany's plan for a massive spending splurge.

"But the news coming out of the UK, I think, is still potentially quite significant in terms of the spring statement but it is being pushed into third place," Foley said.

Markets are also awaiting clarity on U.S. President Donald Trump's reciprocal tariffs on April 2.

(Reporting by Yadarisa Shabong in Bengaluru; Editing by Toby Chopra)