Sterling fell to a seven-week low on Wednesday ahead of a British budget expected to raise economic forecasts but remain thrifty as finance minister Philip Hammond targets curbing a big fiscal deficit. Hammond is due to announce his tax and spending plans for the year at 1230 GMT, in Britain's first full budget statement since it voted to leave the European Union last June.
Strong consumer spending made Britain the second-fastest growing economy in the Group of Seven rich nations in 2016, but Hammond is unlikely to count on that lasting. As signs emerge that consumer spending has slowed amid rising inflation - driven largely by a fall in the pound of around a fifth against the dollar - Hammond has signalled he will not spend the windfall, instead saving it for what could be a testy period of negotiations for Britain as it exits the EU.
Sterling has fallen 2.5 percent in the past two weeks after a run of weaker-than-expected data, with the latest numbers on Tuesday suggesting the economy is heading for a slowdown as Britons feel the strain of rising prices. It fell a further third of a percent on Wednesday to $1.2160, its lowest since January 17. It was also 0.2 percent lower at 86.76 pence per euro.
"We believe that signs of some fiscal tightening could bring the pound under renewed selling interest, bearing in mind that a reduction in government spending could weigh on the nation's GDP," IronFX analyst Charalambos Pissouros wrote in a note to clients. On Tuesday, Britain's House of Lords delivered a defeat to Prime Minister Theresa May's legislation to trigger Article 50 - the notification that will formally begin divorce talks with the EU.
"I think the key reason (sterling is lower) is the Brexit timetable could be under a bit of threat with the amendments the Lords' have passed," said Alvin Tan, currency strategist at Societe Generale. It was unlikely the budget announcement would have a material impact on sterling. "There's been some talk among at least some Conservative MPs of them voting for the Lords' amendments (which) potentially could complicate the Brexit schedule."