By Lucy Raitano

LONDON (Reuters) – Sterling fell against the dollar on Monday as traders braced for the UK government’s fiscal statement on Thursday in a data-heavy week that could shed light on the state of Britain’s economy.

Finance minister Jeremy Hunt said he will set out tax rises and spending cuts this week to show Britain can fix its public finances and restore economic credibility after financial market chaos sparked by former prime minister Liz Truss.

At 1031 GMT, the pound was down 0.46% against the dollar at $1.17870, and virtually flat versus the euro at 87.495.

“The main news over the weekend is the fiscal hole is going to be bigger than previously expected on the back of weaker forecasts from the OBR,” said Mizuho senior economist Colin Asher.

“A worse forecast from the OBR probably means bigger tax hikes or bigger spending cuts – but the pound is little changed in the face of this news. A lot of the fiscal news already seems to be in the price.”

The hotly anticipated plan is the first budget since former Prime Minister Liz Truss’s September “mini-budget” prompted UK bonds to plunge and borrowing costs to soar.

The market is looking ahead to unemployment and wage data on Tuesday, consumer price data on Wednesday and October retail sales data due on Friday for a read on the state of the UK economy.

For Asher, along with Thursday’s statement, labour market data will be key this week.

“Unemployment is obviously a lagging indicator, but labour markets are still very firm. Central banks are actively seeking some softening in the labour markets, but it hasn’t really shown up yet,” said Asher.

Quarterly GDP growth figures on Friday showed Britain’s economy shrank by a less severe than-expected 0.2% in the three months to September, though the data was seen as heralding the beginning of a recession.

The BoE has been hiking rates since late 2021 in the face of soaring inflation, and on Nov. 3 raised rates by the most since 1989, warning of a lengthy economic downturn.

Morgan Stanley said on Monday it expects the Bank of England (BoE) to cut interest rates by 150 basis points in 2024 after stopping its tightening cycle in March.

The pound last Thursday recorded its largest daily gain versus the dollar since March 2020 after the U.S. currency declined in the face of cooling U.S. consumer prices, which supported expectations that the Federal Reserve might slow down the pace of its rate rises.

But sterling is still 12.9% lower against the dollar than it was at the beginning of 2022.

(Reporting by Lucy Raitano; Editing by William Maclean)