Sterling set for best week in over three months on UK budget relief

By Ozan Ergenay

LONDON (Reuters) -Sterling was heading for its best weekly performance in over three months on Friday, in a sign of relief among investors after British finance minister Rachel Reeves revealed her long-awaited budget earlier this week.

Reeves fought back on Thursday against criticism of the government's spending plans, which will fund extra welfare spending by raising the country's tax burden to a post-World War Two high. The government said it planned to raise taxes by 26 billion pounds ($34 billion).

Britain's currency was last down 0.2% at $1.3202. But it was up around 0.85% for the week so far, on track for its biggest weekly gain since early August.

"Sterling's post-budget rise has the hallmarks of a relief rally rather than the start of a sustained trend," George Vessey, lead FX and macro strategist at Convera, said in a note to clients.

"Sterling/dollar pushed above $1.32 as investors broadly welcomed the budget's signal of a more disciplined borrowing path, but the muted overall market reaction suggested much of the fiscal package had already been discounted and sterling's gains likely also reflected the unwinding of pre-event hedges."

However, Vessey flagged that the pound's yield support is set to diminish, capping its room to rally further in the short term as further Bank of England rate cuts loom.

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.

The pound has gained 5.56% since the start of the year against a broadly weak dollar.

The euro meanwhile was steady at around 87.58 pence, down from recent peaks.

(Reporting by Ozan Ergenay in London; editing by Dhara Ranasinghe and)