Sterling ticks lower ahead of closely watched UK spending review

By Lucy Raitano

(Reuters) -Sterling fell against a firmer dollar on Wednesday, as markets geared up for a multi-year UK spending review due later in the day from British finance minister Rachel Reeves, who is set to reveal how public spending will be divided up.

The pound was last down 0.2% versus the dollar at $1.3472, and was weaker against the euro, which rose 0.1% to 84.68 pence.

The dollar edged up against a range of currencies after U.S. and Chinese trade representatives wrapped up two days of talks in London where they agreed on a framework to bring their tariff truce back on track.

Reeves will set out the allocation of around 2 trillion pounds ($2.7 trillion) of public spending, with plans for allocations for research and development, public transport, a new nuclear power station, nuclear submarines and prisons already announced.

"When it comes to day-to-day spending, there's still probably not enough cash to go around, so more money would need to be found in the autumn budget," said Francesco Pesole, FX strategist at ING.

"The take-away for markets today will simply be confirmation that there is very little fiscal headroom."

The only risk for sterling would come from changes in the gilt market, which can be more sensitive to anything related to UK budgets, Pesole said.

Sterling has soared almost 8% in 2025 and is not far off a three-year high of $1.3593 hit on May 26 with trade jitters and wariness over the global economic outlook underpinning dollar weakness. Meanwhile, the fact that Britain is the only country to strike a trade agreement with the U.S. has lent support to the pound.

But the outlook for the British economy remains murky. Jobs data on Tuesday showed pay growth slowed sharply and unemployment rose to its highest level in nearly four years in the three months to April.

The Bank of England is still expected to keep rates on hold at next week's meeting, with markets placing a 90% likelihood on that outcome.

Commerzbank analysts said in a note the jobs data showed the UK's real economy is not as stable as suggested by stronger than expected first-quarter growth figures published last month.

Also complicating the picture was a hotter-than-expected inflation print for April, which at the time dampened the prospect of a delay to cuts from the BoE.

(Reporting by Lucy Raitano; Editing by Amanda Cooper and Joe Bavier)