Sterling steady ahead of Britain's long-awaited budget

By Ozan Ergenay

LONDON (Reuters) -Sterling was steady against the dollar early on Wednesday as wary investors awaited what is expected to be a tax-heavy budget from British finance minister Rachel Reeves, with her speech due to start at around 1230 GMT.

Reeves is expected to raise tens of billions of new tax revenue in a budget that will test her credibility with investors.

The pound was last down less than 0.1% on the dollar at $1.3159. It is up around 0.6% for the week so far, however, partly thanks to the weaker dollar and traders fine-tuning their positions heading into the speech.

PREPARED FOR BAD NEWS

"I think the market has, in recent weeks, probably months, built up short positions in sterling, so I think the market is prepared for bad news," said Jane Foley, head of FX strategy at Rabobank.

"That is why we saw Sterling a little bit higher yesterday. I believe there is scope that if we don't get have any big negative surprises today, there may be even a little bit of short covering," she said.

The pound was also steady against the euro at 87.91 pence, very marginally stronger so far this week.

In the medium term, however, most analysts see the pound weakening further as the Bank of England cuts rates.

Reeves' public remarks ahead of the budget indicate she hopes it will put downward pressure on prices, making it easier for the BoE to ease.

"Keeping inflation down is a theme, because Reeves needs the BoE to cut interest rates," Foley 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.

(Reporting by Ozan Ergenay in London; Editing by Conor Humphries)