June 14, 2010 / 3:14 PM / 10 years ago

Sterling hits 1-month high vs dollar on fiscal forecast

LONDON (Reuters) - Sterling rose more than 1 percent to hit a one-month high against the dollar on Monday, buoyed by lower UK public borrowing forecasts, hawkish comments from policymakers and better sentiment towards risky assets.

The Office for Budget Responsibility — created by the new Conservative-Liberal Democrat coalition — forecast state borrowing would fall a little faster than originally thought, partly due to higher tax receipts.

Further support came from comments overnight and in the media at the weekend by Bank of England policymakers warning of rising inflation and highlighting the possibility of UK interest rates rising later this year.

“The OBR forecasts show the fiscal position is not as bad as expected, which is very good in the current climate, and as regards monetary policy people are having second thoughts about when the BoE might hike rates,” said Audrey Childe-Freeman, currency strategist at Brown Brothers Harriman.

“On the international front, it seems the market is going through a corrective phase and global market sentiment is improving, which is helping sterling,” she added.

The dollar came under selling pressure as world stocks headed for a fourth successive day of gains, prompting investors to trim short positions in higher risk currencies.

Commodity Futures Trading Commission data showed speculators increased sterling short positions in the week to June 8. <IMM/FX>

At 3:24 p.m. BST, sterling was up 1.5 percent against the dollar at $1.4767, having hit a one-month high of $1.4788 after traders said stop losses were triggered beyond $1.4760 but it stopped short ahead of further barriers around $1.4800.

The euro fell 0.3 percent to 82.96 pence, while sterling’s trade-weighted index rose 0.4 points from Friday’s close to 80.7.

There was some caution, however, as the UK’s fiscal watchdog also downgraded its forecasts for economic growth from 2011, and some analysts said worries about fiscal austerity choking the UK economic recovery could pressure sterling further down the line.

“The market has taken some comfort (from) the slight downward revision in the deficit, but sterling may come under pressure again on the cut in the growth forecast,” said Ian Stannard, senior currency strategist at BNP Paribas.

The forecasts came ahead of next week’s budget presentation by Finance Minister George Osborne.

INFLATION FOCUS

Inflation figures on Tuesday are forecast to show the headline annual CPI rate dipping to 3.5 percent in May but still staying well above the BoE’s 2 percent target.

The BoE’s Andrew Sentance said in a newspaper that Britain’s economic recovery and resilient inflation questioned how long monetary policy could remain highly expansionary. BoE Chief Economist Spencer Dale said inflation risked staying higher for longer.

“The comments were a reminder that CPI figures due tomorrow will show inflation clearly above the BoE’s upper limit,” said Christian Lawrence, currency strategist at RBC Capital Markets.

Although policymakers have said they expect inflation to ease in the coming months, it has so far proved stickier than they previously envisaged.

Additional reporting by Tamawa Desai

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