Sterling drifts lower as Hammond raises prospect of end to austerity

LONDON (Reuters) - The pound drifted lower on Monday as Britain’s Chancellor Philip Hammond laid out the prospect of an end to austerity so long as Britain agrees a Brexit deal with the European Union.

FILE PHOTO: UK pound coins plunge into water coloured with the European Union flag colours in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic

Hammond’s annual budget, with many of the announcements contingent on Britain avoiding a disorderly departure from the EU in March, was largely a non-event for a currency more concerned with the Brexit negotiations.

However, sterling did edge lower in late European trading, partly as a result of a stronger dollar.

The British currency fell to as low as $1.2791 GBP=D3, down 0.2 percent on the day as Hammond spoke to members of parliament, after earlier trading mostly above $1.28.

That left the currency close to two-month lows of $1.2777 reached last week.

After a decade of cuts to public services, Hammond offered a glimpse of higher spending. But he made clear that more spending will hinge on London getting a Brexit agreement with Brussels, putting pressure on rebels in the ruling Conservative Party to back Prime Minister Theresa May.

Against the euro, the pound traded flat at 88.90 pence per euro EURGBP=D3, unmoved by the budget announcements that included a fall in Britain's expected borrowing needs between now and the mid-2020s.

Sterling traders are turning their attention to the Bank of England’s monetary policy meeting on Thursday, where the central bank is expected to keep interest rates on hold but detail the conditions necessary for policy tightening.

“Were it not for Brexit, the BoE on Thursday would probably be providing guidance on a rate hike, possibly in February given the compelling evidence of rising wage growth,” MUFG analysts said in a note.

Simon Derrick, chief currency strategist at BNY Mellon, said that pricing in sterling options markets signalled increasing concern about the outlook for the currency heading into 2019.

“Since the October 17 EU summit...renewed outflows have begun to emerge as investors have become steadily more concerned about the lack of agreement between the EU and UK on the divorce deal,” he said.

Reporting by Tommy Wilkes; editing by David Stamp