By Medha Singh
LONDON (Reuters) – Sterling firmed against the dollar and the euro on Thursday, alongside a rise in British government bond yields, as investors assessed the outlook for the Bank of England’s monetary policy.
The pound firmed 0.4% to $1.29695 against the dollar, not far from the $1.30 mark after sliding to the lowest since mid-August in the previous session.
A Guardian report on Wednesday said that British finance minister Rachel Reeves will change how the government assesses the public finances to free up room for billions of pounds in extra capital spending upped the chances of the BoE keeping rates higher for longer.
Yields on British government bonds rose as money markets priced in a roughly 89% chance on a quarter-point interest rate cut by the BoE at its November meeting, down from a 100% probability earlier this week.
“Higher yields can be a symptom of concern about fiscal policy, but that’s not translating into a weaker sterling, so I would not exaggerate too much about the fiscal concern yet,” said Kenneth Broux, head of corporate research FX and rates at Societe Generale.
Investors are cautiously awaiting Reeves’ budget plan next Wednesday, after she has warned some taxes will have to rise after identifying a 22 billion-pound fiscal hole soon after the Labour Party came to power in July.
The latest survey of British business activity showed companies reported the slowest growth in 11 months in October, as uncertainty ahead of the Labour government’s first budget dampened confidence.
Overall, the dollar index stalled after hitting a near three-month high of 104.570 in the prior session, aiding major currency pairs’ rise.
The pound came under pressure overnight after BoE Governor Andrew Bailey said there were still “outstanding questions” about whether price pressures could remain stubborn.
“Additional economic data and clarity on the fiscal and monetary policy outlook will likely be needed before long-run inflation expectations can potentially ease lower again,” Lloyds Bank strategists said in a note.
Against the euro, sterling ticked higher to 83.293 pence.
(Reporting by Medha Singh in London; Editing by Amanda Cooper and Maju Samuel)
