Sterling fell to a session low on Wednesday after the UK government cut its growth forecasts and said borrowing would fall more slowly than hoped, while less hawkish than expected Bank of England minutes drove speculators to trim long positions.
Sterling's 200-day moving average is around $1.5730, with many also citing support at $1.5985 - the low hit on March 16. Sterling fell to a session low of $1.6219 on Wednesday, with a large UK clearer said to be a big seller.
The pound had risen to a 14-month high of $1.6403 on Tuesday after data showed UK consumer prices rising at more than twice the government's 2 percent target pace on a year-on-year basis. Traders cited stop-losses lurking below $1.6200. They also said a large buyer in the options markets of overnight $1.6200 sterling strikes put pressure on to the spot rate.
The pound was already under pressure before the budget was presented, having lost ground after the BoE minutes suggested that the risks to inflation and growth had both risen as a result of soaring oil prices. British Finance Minister George Osborne cut the 2011 growth forecast to 1.7 percent from 2.1 percent previously in his budget. Osborne said soaring oil prices meant inflation would remain between 4 and 5 percent this year. Also, although borrowing projections for 2011-12 were reduced, borrowing over the 2012-15 period is seen at 36 billion pounds more than forecast in November.
"Today's budget has reinforced the fact that austerity is coming... (and) that the UK economy is in for a rough ride over the next few months and years," said Kathleen Brooks, research director at Forex.com. The minutes from this month's BoE policy meeting showed no more policymakers had joined the camp wanting to raise rates, with three out of nine MPC members backing a hike and the rest wanting to hold rates at a record low of 0.5 percent. The central bank said that there was a "significant risk" inflation could exceed 5 percent in the coming months but that it was too early to tell how strongly the economy was recovering after a surprise contraction at the end of last year.
Investors are still fully pricing in a quarter percentage rate hike in July, unchanged from before the minutes were released. A hawkish bias in the minutes could have led investors to bring forward their expectations to June. The euro rose against the sterling, and was last up 0.3 percent at 86.90. It rose to a high of 87.25 pence, bringing it back within sight of a 4-month high of 87.59 hit last week, with the European Central Bank seen likely to raise rates before the BoE. Traders will await February retail sales numbers on Thursday. Analysts are expecting sales to fall 0.6 percent from a month earlier, and a disappointing number could see sterling shed further ground.