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Sterling inched up from a one-month low on Thursday, drawing some support from a British budget bill that was not as fiscally tight as many investors had expected, as well as strong numbers from the housing market. The pound was unmoved by the Bank of England's decision to, as expected, keep its benchmark interest rate at the record low of 0.5 percent, as policymakers grappled with how to balance improving wage growth in Britain against more ominous signals from the global economy.
The outlook for BoE interest rates hinges to a large extent on how rapidly British wage growth picks up. In the budget he presented on Wednesday, finance minister George Osborne announced it would now take four years, not three, to achieve his aim of turning Britain's hefty budget deficit into surplus. "The profile of fiscal consolidation is a little bit softer, with less austerity implied for 2016 ... so perhaps that is helping (sterling) marginally although that was signalled before the budget," said Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ.
"But there's not a whole lot going on. I think the market is just waiting to see what's going to happen in Greece." Sterling was up 0.2 percent against the dollar at $1.5387, having fallen to a one-month low of $1.5330 on Wednesday. Against the euro it was half a percent higher at 71.80 pence, off a three-week low of 72.24 pence struck on Wednesday.
The Royal Institution of Chartered Surveyors earlier said its monthly house price balance jumped to +40 in June from +34 in May. That was the highest since July 2014 and a bigger rise than most economists polled by Reuters had expected. Investors are pricing in the chance of a first rate increase around the first quarter of next year. Expectations for an earlier tightening were pushed back in recent weeks because of global alarm about Greece and warnings by BoE officials about the impact of a strong currency on growth.
"Developments in Greece and China, while they are not concerns of direct contagion, are nonetheless a serious risk factor as contagion might spread across the euro area or Asia, to which the UK and the global economy is much more exposed," wrote Barclays strategists in a research note. British government bonds tracked German debt lower as investor sentiment improved and share prices rebounded from losses earlier in the week. Ten-year bond yields rose by 6 basis points on the day to 1.95 percent, while their spread over Bunds held broadly steady at 123 basis points.

Copyright Reuters, 2015

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