Sterling snaps five-day rally versus the dollar, caution on UK budget

By Stefano Rebaudo

(Reuters) -Sterling snapped a five-day rally on Thursday as investor focus shifted back to economic fundamentals, with analysts questioning whether the fiscal tightening announced in the budget on Wednesday will actually be implemented.

The greenback edged up against its major peers on Thursday, pausing in what is set to be its biggest weekly decline since July. 

The pound was down 0.15% at $1.3219, after hitting a new one-month high earlier in the session at $1.3269.

Analysts said lingering concerns over growth and the Bank of England’s easing path were likely to keep the pound under pressure.

"Fears about slow growth, weak productivity and sticky inflation are not reflective of an attractive investment backdrop," said Jane Foley, senior forex strategist at Rabobank, confirming the view that the euro will creep higher versus the British currency into 2026.

The single currency hit a fresh one-month high at 87.46 pence and was last roughly unchanged at 87.59 pence.

Sterling and UK bond prices edged up in volatile trade on Wednesday after British finance minister Rachel Reeves delivered a larger fiscal buffer than previously expected in a closely anticipated budget.

GILTS MARKET TAKES COMFORT 

However, the gilts market took comfort from Reeves’ reassurances that she would keep a tight grip on public finances, and from the news of an increase in fiscal headroom.

Yields on 30-year gilts, more sensitive to long-term fiscal concerns, dropped more than 10 basis points on Wednesday and were last up 2 bps at 5.228% on Thursday.

However, analysts are still worried about the UK fiscal trajectory.

"Sterling is not out of the woods yet," said Dominic Bunning, head of G10 forex strategy at Nomura International.

"Backloading the tightening, until largely the next election, still risks credibility and cyclical momentum is soft but we will look for better levels to re-engage with the British pound underperformance trades," he added.

Under current law, a nationwide vote is due by August 2029, though the prime minister can call an early election at any time.

"Most of the planned tax rises do not kick in until 2029 and beyond," said David Zahn, Head of European Fixed Income at Franklin Templeton.

"This approach effectively kicks the can down the road until the next parliamentary election to deal with the spending gap," he added.

(Reporting by Stefano Rebaudo; editing by Ed Osmond)