LONDON: Sterling weakened to trade near a two-week low against the euro and the dollar on Wednesday, with investors selling the currency on expectations that a fresh bout of fiscal austerity in Britain would keep interest rates lower for longer.
Chancellor George Osborne is due to present his Autumn Statement in parliament at 1230 GMT, in which he will set out plans for deep spending cuts in government and welfare as he seeks to turn Britain's big budget deficit into a surplus by the end of the decade.
Analysts said that plans for more fiscal tightening would push back expectations of a rate hike in the near future.
Sterling was down 0.25 percent against the euro at 70.715 pence per euro, having hit a low of 71.80 pence --its lowest in two weeks earlier in the day. It was flat against the dollar at $1.5084, having fallen to a two-week low of $1.5053 on Tuesday.
"Will fiscal austerity be rewarded or is the market instead looking for growth? We tend to think sterling could edge lower on a tight budget today, but euro/sterling looks a sell near 71 pence," said Chris Turner, head of currency strategy at ING.
Investors expect a rise in BoE rates at the end of 2016 after the bank's latest Inflation Report this month, which saw it cut growth forecasts and warn of the deflationary impact of a strong pound.
But these expectations were pared back on Tuesday after the head of the Bank of England said UK rates were likely to stay low for "some time". Speaking to lawmakers, Governor Mark Carney said although there would be no need for negative rate, the British economy was in a prolonged low interest rate environment.
"The BoE has delivered a clear signal that it wants a lower sterling," Morgan Stanley analysts said in a note referring to Carney's and BoE chief economist Andy Haldane's testimony on Tuesday. "We anticipate broad sterling weakness," they added.
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