LONDON (Reuters) - Sterling touched a two-week low against the dollar on Wednesday as the details of the 2016 budget underlined growing concerns among investors over an economy also facing the threat of June’s Brexit referendum.
Losing ground along with a number of other currencies against the dollar, the pound fell as low as $1.4053 after the independent Office of Budget Responsibility revised down its growth outlook for the UK.
Chancellor George Osborne, delivering his annual budget in parliament, said the OBR was forecasting the economy would grow by 2 percent this year, lower than the 2.4 percent growth forecast in November, and then 2.2 percent in 2017.
“Sterling was on the back foot walking into the statement, and although it doesn’t typically trade around the policy announcements, it furthered its loss on the day,” said Tobias Davis, Head of Corporate Treasury Sales at Western Union in London.
Sterling later recovered but was still down 0.4 percent on the day at $1.4092. It was roughly steady at 78.51 pence per euro and is still some way off lows around $1.38 hit after the announcement last month of a June 23 date for the Brexit referendum.
The uncertainty over investment and what the next two years will hold for British businesses in the event of a vote to leave the European Union has also helped stoke outside bets on a cut in interest rates by the Bank of England in the next year.
Some in the market have speculated one or more of the Bank of England’s nine policy committee members could even signal his or her concern over growth by voting for a cut at Thursday’s meeting.
Money market rates, while skewed by the bank’s quantitative easing, do suggest a cut in rates over the next year is more likely than a rise. But few analysts are actively arguing for that.
“We don’t expect a BoE bombshell, but there are dovish risks, making sterling a better short,” said Citi strategist Josh O’Byrne.
“Data has been disappointing in the past month, we’ve priced out most cut risk but there are no hikes before 2019. The bank could serve a reminder policy isn’t ready to become a sterling positive.”
Editing by Ed Osmond