Sterling set to end week higher with spending plans in focus

By Johann M Cherian

(Reuters) -Sterling was on track to finish the week higher on Friday, supported by a UK economy largely resilient in the face of global turbulence, although investors will be monitoring the government's spending plans.

The pound has gained about 0.6% this week, strengthened by data that showed UK services sector activity expanded more than expected.

The currency was also boosted by relief Britain was spared from further U.S. tariffs on steel and aluminium following its deal with Washington last month.

The pound slipped 0.2% to $1.3544 on Friday after touching its highest level since February 2022 the previous day. Against the euro, it was steady at 84.38 pence.

Traders are still concerned, however, about the sustainability of growing debt loads in developed markets.

A gilt auction this week indicated healthy demand for UK debt, but finance minister Rachel Reeves' spending plans on Wednesday could be the next test.

The plans will set government departments' budgets up to 2029, with the focus on public investment in infrastructure and taxation plans, when analysts say sources of funding are diminishing and the benchmark gilt yield is among the highest in developed markets.

"Wednesday's spending review will epitomise just how tight things look for UK government departments," said James Smith, an economist at ING.

"And life is only going to get harder for the Treasury in the autumn. We think the government's 'headroom' will fully evaporate and that tax rises look increasingly inevitable later this year."

Many of sterling's gains this year have resulted from a broadly weak U.S. dollar as investors price in the risk that President Donald Trump's erratic policymaking could result in a U.S. recession that could spill over to the rest of the world.

Against this backdrop, Bank of England policymakers have urged a gradual and cautious approach to monetary policy decision-making.

Interest rate futures point to the central bank leaving interest rates unchanged at its upcoming policy meeting, according to data compiled by LSEG.

On the data front, British house prices fell by more than expected in May following an increase in property transaction taxes the prior month, Halifax said. The mortgage lender also said that the housing market looked "broadly stable".

The market will also focus on a U.S. jobs report later in the day.

(Reporting by Johann M Cherian; Editing by Amanda Cooper and Barbara Lewis)