UK austerity budget boosts sterling sentiment

The toughness of Britain's austerity budget unveiled last month persuaded foreign exchange strategists to notch up sterling forecasts for the first time in seven months, a Reuters poll showed on Wednesday.
In the first Reuters survey of around 60 forex analysts since the new government's emergency budget, median forecasts showed the pound dipping from around $1.51 now to $1.46 in six months, before recovering to $1.49 in 12 months.
Last month's poll, conducted the week before the June 10 budget, saw the pound flat at $1.45 across the one-year outlook. While respondents were still pessimistic about sterling regaining any strength from now, Wednesday's poll was the first this year to show an upwardly revised outlook for the UK currency.
New Finance Minister George Osborne's budget was one of the toughest in generations, designed to tackle Britain's worst peace-time budget deficit with heavy spending cuts and increased sales taxes.
"The strong UK emergency budget has restored confidence and dismissed speculation about a possible UK (credit rating) downgrade," said Roberto Mialich of UniCredit MIB.
But whatever the positive implications of the budget for sterling, worrying signs of weakness ahead for the world economy were also at the forefront of forecasters' concerns. Forward-looking indicators like purchasing managers indexes and sentiment surveys point to a marked slowdown in growth in major world economies in coming quarters as austerity measures kick in.
Reflecting such heightened uncertainty, the range of forecasts for the 12-month outlook widened from 43 cents in June to 47 cents in the latest poll.
"It is a big question whether the austerity plan will derail the recovery," said Niels Christensen of Nordea.
"Data releases in the near future will be a big test for sterling as the big theme on FX markets turn towards the sustainability of the economic recovery in an environment where fiscal tightening is high on the political agenda." Washington policymakers like US Treasury Secretary Timothy Geithner warned last month that big European states risk a return to recession if they were to cut spending too hard and too fast.