Sterling hits 1-mth low vs euro, braced for austerity

Wed Dec 5, 2012 9:25am GMT

Related Topics

* Autumn statement expected to show austerity measures

* Euro at 1-mth high versus sterling

* Services PMI due at 0930 GMT to show expansion

By Philip Baillie

LONDON, Dec 5 (Reuters) - Sterling hit a one-month low against the euro on Wednesday as investors braced for grim economic tidings from the UK's finance minister in his autumn budget statement.

Losses could be checked, however, if services sector PMI data, due at 0930 GMT, is stronger-than-expected.

A Reuters poll forecasts the PMI data at 51.1 for November, which would already be a slight pick-up in growth compared with 50.6 the previous month. A figure above 50 denotes expansion.

The euro was up 0.2 percent against the pound in early trade at 81.45 pence, its highest since Oct 24. and could see it target the October highs of 81.65 pence.

The pound was flat on the day against the dollar, trading at $1.6102, though not far from the $1.6131 peak hit on Tuesday.

"The services PMI is expected to rise...we see expansion in the UK so that should be moderately supportive for sterling," said Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets.

BMO's Childe-Freeman added the euro's latest gains against sterling tracked a broad rise in the single currency and the pair would take further cues from the Chancellor George Osborne's statement, due around 1230 GMT.

Osborne is likely to paint a darker picture for the UK economy and commit to further spending cuts for years into the future - potentially further hampering recovery - in a bid to save his deficit reduction plan.

Lowered growth forecasts could open the way to more quantitative easing by the Bank of England, which is negative for the pound, but if the fiscal austerity programme is relaxed too much that could also be negative for sterling, Childe-Freeman said.

Some analysts said this could bring rating agencies to question the UK's prized triple-A credit rating, although opinion is divided, given Osborne is sticking to his deficit-busting programme.

"We think that the autumn statement would reduce the risk of a potential sovereign downgrade of the UK in coming months. In turn, this could reinforce the status of sterling as a safe haven proxy for the euro," Citi told clients in a morning note.

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