Sterling rallies ahead of budget

The pound was up 0.17% at $1.3188, bringing gains against the dollar over the past five days to 1%, the largest week-on-week rise since mid-August

Sterling rallied for a fifth day against a flagging dollar on Wednesday, hours before the British finance minister is expected to announce billions of pounds of tax rises as she attempts to retain the confidence of bond investors and voters.

Rachel Reeves is under pressure to keep Britain’s finances on track while sticking to her own fiscal rules. She has been forced to consider a wide range of measures to balance the books in the face of a weaker than previously expected economic outlook and higher debt costs.

Economists expect up to £30 billion of tax increases when she addresses parliament at around 1230 GMT.

The pound was up 0.17% at $1.3188, bringing gains against the dollar over the past five days to 1%, the largest week-on-week rise since mid-August. That has been driven mostly by dollar weakness triggered by investor bets on U.S. interest rates dropping sharply in the coming year.

Against the euro, the pound has rallied, albeit more modestly, gaining 0.5% in the past week. It was last steady at 87.88 pence.

The focus in the long run-up to this budget has mostly been about tax rises and an ever-growing welfare bill. However, for financial markets, the focus is on whether this budget can deliver growth, said XTB research director Kathleen Brooks.

She said: Thus, the OBR’s forecasts alongside the Chancellor’s message will be scrutinised to see the trajectory of the UK economy. If the outlook is weak, then the market reaction could be brutal, and the pound may come under downward pressure.

The independent Office for Budget Responsibility will release its own economic and fiscal forecasts about an hour after Reeves addresses lawmakers.