Sterling slips as budget brushed off, Brexit back in focus

LONDON (Reuters) - Sterling edged down from a six-week high on Thursday, with traders largely brushing off cuts to Britain’s economic growth forecasts announced in the previous day’s budget statement and refocusing on Brexit negotiations.

Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

Prime Minister Theresa May will visit Brussels on Friday, where European Union negotiators hope she will run the risk of a domestic backlash by raising Britain’s divorce bill offer to secure a deal in December.

Local media reports over the past week suggest May has secured backing from pro-Brexit hardliners in her cabinet to increase the offer, which has given the pound a modest lift in recent days.

But May’s room for manoeuvre to cut a deal that would please business while also pleasing those Britons who want a sharper break with Brussels remains limited. And Germany and France, the Union’s lead powers, have taken a tough line so far.

Analysts said it was Brexit developments rather than the Office for Budget Responsibility’s (OBR) slashing of growth forecasts, which markets had expected, that were driving sterling.

“The OBR’s position on the weakness of productivity and the dismal economic outlook isn’t exactly new news – we knew all of that before,” said Societe Generale macro strategist Kit Juckes.

“The uncertainties around Brexit aren’t any more or less than they were two days ago... The pound is priced for bad news and (is) cheap on any measure, so we move up more on good news than we move down on bad news.”

The pound had reached as high as $1.3337 in Asian trading on Thursday, its strongest since Oct. 13, as the dollar extended falls after a dovish set of minutes from the U.S. Federal Reserve handed the greenback its worst day since June.

It eased back to trade at $1.3304 by 1620 GMT, down 0.2 percent on the day but half a percent up compared with before the budget statement.

Against a stronger euro, sterling was down a third of a percent at 89.02 pence.

Some analysts suggested the OBR’s projections had been deliberately pessimistic.

“The markets recognise that both the OBR and BoE (Bank of England) have recently been seen to take a more cautious stance when forecasting growth, so many are looking at these new forecasts as a worst-case scenario that is likely to be bettered,” wrote FxPro analysts in a note to clients.

Sterling showed little reaction to data on Thursday showing the economy grew at 0.4 percent in the third quarter, as expected, with households increasing the pace of their spending.

Editing by Gareth Jones and John Stonestreet