Sterling treads water as data paints sombre picture before budget

By Ozan Ergenay

LONDON (Reuters) -Sterling was little changed on Friday as investors awaited Britain's upcoming budget, with data showing the economy struggled before next week's major test for the currency and bond market.

The pound was last down less than 0.1% against the dollar at $1.3063. It was set to lose 0.8% for the week. 

The last major economic releases before the budget next Wednesday painted a sombre picture, with borrowing hitting the highest on record outside of the COVID-19 pandemic in the first seven months of the year. 

Business growth almost ground to a halt this month, retail sales tumbled in October, and a closely watched gauge of household sentiment fell. 

"The data highlights the challenging position that the government is currently in ahead of the budget," Lee Hardman, senior currency economist at MUFG, said.

"The government borrowing figure is obviously worse than anticipated, but that won't feed into the government's budget proposals. It is too late for that." 

British finance minister Rachel Reeves is expected to need to raise tens of billions of pounds to stay on track to meet her self-imposed fiscal targets.

Media reports last week that she would not raise income tax roiled British assets. Just days before she had appeared to prime the market that tax hikes were coming. 

MUFG's Hardman said the timing of the budget will dampen the growth outlook heading into next year, putting pressure on the Bank of England to keep lowering interest rates.

"We think they'll cut rates in December and then deliver two more cuts by the summer," Hardman added.

The BoE kept interest rates unchanged in November in a tight 5-4 vote, but markets expect the central bank will resume its rate-cutting cycle when it convenes next month. 

Money market traders are currently pricing in a more than 80% chance of a rate cut from the BoE in December. 

Elsewhere, the pound was flat at 88.21 pence per euro, but declined against a strengthening yen after the Japanese currency found some support as officials stepped up their verbal intervention to stem the currency's decline.

Sterling was last down 0.5% at 204.71 yen, after rising to its highest since July last year on Thursday.

(Reporting by Ozan Ergenay in London, editing by Samuel Indyk and Andrew Heavens)