Sterling firms after China yuan move; budget eyed

* Sterling edges up to 5-1/2 week high vs dollar

* Pound last up 0.3 percent at $1.4880 GBP=

* Focus on Tuesday's UK budget; spending cuts eyed

By Tamawa Desai

LONDON, June 21 (Reuters) - Sterling gained against a broadly weaker dollar on Monday as risk-taking sentiment perked up after China's weekend announcement that it would make the yuan more flexible [ID:nN20208975].

The market was also underpinned by UK data on Friday that showed Britain's budget deficit came in lower than expected in May. [ID:nLDE65H0KT]

The pound hit a 5-1/2 week high of $1.4936 GBP=D4. By 0757 GMT, it was at $1.4880, up 0.3 percent from late U.S. trade on Friday.

The euro was little changed at 83.58 pence EURGBP=D4.

"The initial reaction to China's move was to play it as a positive risk and push the dollar down; sterling has benefitted from that as well," said Adam Cole, global head of currency strategy at RBC Capital Markets.

Technical analysts said sterling could rise a little further.

Nicole Elliott at Mizuho Corporate said: "The weekly close just above $1.4850 has eased bearish pressure and moving averages have turned bullish. Expect another short squeeze this week where we would target a move to $1.5200."

Data last Friday showed currency speculators sharply trimming long U.S. dollar positions, with net short sterling contracts falling to 48,134 contracts in the week ended June 15 from 74,680 the previous week. [IMM/FX]. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on CFTC futures positioning

r.reuters.com/kus26k ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Reaction was limited to data from property website Rightmove which showed asking prices for British homes rose 5.0 percent higher on a year ago in June, up from a 4.3 percent annual gain in May. [ID:nLDE65H1YB]

The market's focus this week will be the new UK government's first budget on Tuesday, which is likely to be the tightest in at least 30 years in a bid to rein in the deficit. [ID:nLDE65G22W]

While aggressive fiscal tightening would help keep sovereign credit risk concerns at bay and support the UK currency, analysts said the pound may come under pressure.

"The budget will outline a series of spending cuts and tax hikes that will herald the coming drop in personal incomes, and sterling is likely to come under renewed selling pressure," BNP Paribas analysts said in a note.

Tighter fiscal policy would likely prompt the Bank of England to keep monetary policy looser for longer, which would also weigh on the pound. (Graphics by Scott Barber, editing by Mike Peacock)