LONDON (Reuters) - Sterling eased back from an eight-day high against the euro on Tuesday, with investors focused on Wednesday’s UK budget statement in which finance minister Philip Hammond will have to balance calls for more spending against weaker growth.
British government borrowing unexpectedly grew last month, data showed earlier on Tuesday, underscoring the challenge for Hammond, who is already under pressure to help embattled Prime Minister Theresa May in his tax and spending plans.
Having earlier hit an eight-day high of 88.41 pence per euro, sterling weakened to trade slightly lower on the day at 88.72 pence, with a Bank of England inflation report hearing in parliament not giving markets much new information to trade on.
Rate-setters spelled out their differences to lawmakers over the central bank’s first interest rate hike in a decade, as they focused on how to determine when low unemployment was about to push up inflation.
“Investors who were expecting some fireworks from today’s UK inflation report hearings were left empty-handed after BoE officials chose their words carefully,” said Lukman Otunuga, research analyst at FXTM.
“Most BoE officials reiterated expectations that UK inflation would peak this quarter. With the remarks made in line with what the BoE has already shared with markets, sterling offered a fairly muted response.”
Against the dollar, sterling was flat at $1.3235 <GBP=D3, not far from a 2-1/2-week high of $1.3279 touched on Monday, with analysts citing cautious optimism about Britain reaching a deal with the European Union as supportive of the pound.
Britain’s Brexit minister David Davis said on Tuesday that reaching a deal was the most likely outcome of talks, but added the British government was prepared for no agreement with the bloc.
May met with senior members of her ministerial team on Monday amid expectations that she will offer the European Union more than she committed to during a speech in Florence in September that failed to provide a breakthrough in the stalled negotiations.
Media reports said ministers had agreed to make a financial offer that would increase May’s existing commitment, though there were differing accounts, which investors said was keeping a lid on any gains for the British currency.
The Independent news website said May’s opening offer could double to around 40 billion euros but it gave no details, while the BBC reported that no specific amounts had been discussed during the meeting.
“It’s not a done deal yet by any means. I remain pessimistic and think there could be significant disappointment that would lead to a lower pound,” ACLS Global chief strategist Marshall Gittler said.
Editing by Angus MacSwan and Mark Potter