Sterling drops against dollar, euro

Sterling fell 1 percent against the euro and nearly 0.7 percent against the dollar on Wednesday, after Britain's finance minister announced spending cuts in a budget speech that also lowered growth forecasts. Growth for 2015 was forecast to be 2.4 percent, down from a forecast of 2.5 percent made in March, George Osborne told parliament, although the economy was still expected to outpace the US, Germany and France.
Investors had been expecting a degree of fiscal tightening to be announced after the Conservative Party won the May general election. Osborne said he would freeze working-age benefits for four years and raise the thresholds at which Britons can access the country's tax credits system. All in all, the welfare reforms announced on Wednesday are expected to save the 12 billion pounds which Osborne says he needs to meet a revised target of eliminating the budget deficit by the 2019/20 financial year.
"There has been a modest downgrade to growth and an element of fiscal tightening. We are seeing sterling drift lower while short euro positions are getting flushed out," said Jeremy Stretch, head of currency strategy at CIBC World Markets. Sterling was down 0.65 percent at $1.5363, having hit a four-week low of $1.5353 just before the first solely Conservative budget in two decades was delivered at 1130 GMT. Sterling was down 1 percent against the euro, trading at 71.92 pence per euro.
Sterling had jumped on the back of some better economic numbers in recent weeks. But with Greece's problems threatening another shock to European economies, Osborne's pledge to go harder on austerity and start reducing overall debt soon bodes ill for the immediate growth outlook, analysts said.
"Osborne has frontloaded some of the bad news so the end result today may not be quite as bad for sterling, but on top of Greece it is still an austerity budget," said Jane Foley, senior currency strategist with Rabobank in London. Traders said doubts over growth and fiscal tightening could see markets reprice expectations of when the Bank of England would start to raise interest rates. Investors are currently pricing in a chance of the first rate hike in the second quarter of next year.