Sterling briefly gains to $1.30 against the dollar, BoE in focus

By Stefano Rebaudo

(Reuters) - Sterling hit a fresh 4-1/2-month high at $1.30 against the dollar on Tuesday on rising expectations the Bank of England will not cut interest rates later in the week, while the pound dropped against the euro, which was buoyed by Germany's spending plans.

The pound continued to be driven by developments in Europe and the United States. Germany was about to vote on a massive state borrowing programme to fund infrastructure and military spending, while the U.S. threat of tariffs has increased uncertainty about the global economic outlook.

The euro hit fresh highs against the dollar and the yen on Tuesday, ahead of the possible approval of the fiscal stimulus in Germany which could boost euro area's growth.

The pound was flat at $1.2992, after hitting $1.3005, its highest level since November 7.

The BoE will likely stick to its mantra of only gradual moves ahead as it grapples with the fallout from U.S. President Donald Trump's trade war and mixed news on Britain's economy.

"We don't rule out a faster pace (of the BoE easing path) though that would require more obvious and abrupt signs of weakening in the jobs market," said James Smith, developed markets economist UK, at ING, after flagging likely rate cuts in May, August and November.

Money markets priced in 54 bps of BoE easing moves in 2025 and an 89% chance of no change in rates this week. [IRPR]

"We doubt the government's Spring Statement on March 26, where some spending cuts are widely expected, will dramatically change the story for the Bank," Smith said.

The Organisation for Economic Cooperation and Development (OECD) lowered its forecast for British growth this year to 1.4% from its December forecast of 1.7% ahead of the budget update.

British finance minister Rachel Reeves' headroom for meeting her budget rules has probably turned into a 4.4 billion-pound ($5.7 billion) deficit, requiring tough measures next week to get her back on track, a think tank said on Monday.

Versus the euro, the pound was down 0.15% at 84.19 pence, having weakened sharply from around 82 pence per euro in early March, on the back of Germany's massive spending plans.

(Reporting by Stefano Rebaudo, editing by Susan Fenton)