LONDON: Sterling stayed steady on Tuesday as traders looked beyond worse-than-expected public borrowing numbers to Bank of England minutes, due during the following session, keeping their focus on when interest rates might rise.
Trading volumes were well below the past month's average.
Third-quarter gross domestic product numbers on Friday could provide some support for the currency, traders said, as doubts grow about the solidity of Britain's economic recovery in the face of a worsening outlook in Europe.
Last week poor inflation and wage growth data -- both of which the Bank of England (BoE) has said are crucial in deciding when to raise interest rates -- drove investors to push back bets on when rates would rise into the second half of next year.
That repricing of rate expectations saw sterling lose more last week against the euro than it has for eight months, and the uncertain monetary policy outlook has seen the pound shed almost 6 percent against the dollar over the last three months.
"We've had a situation where BoE rate hikes are now being priced out into the second half of next year, and that's definitely been very negative for sterling," Societe Generale currency strategist, Alvin Tan, said.
Data showing that British government borrowing was more than 10 percent higher over the last 6 months than over the same period last year had little immediate impact but underlined one of Britain's big long-term economic weaknesses.
Sterling was flat against the dollar at $1.6156, and up 0.1 percent against the euro, which traded at 79.075 pence.
Citi's head of European G10 FX strategy, Valentin Marinov, said any dips in the pound could provide a buying opportunity ahead of the BoE minutes and data later in the week.
UNCERTAINTIES
BoE Chief Economist Andrew Haldane said on Friday that markets may be right to bet the first rate hike since 2007 would come in the middle of 2015. He also said he was in favour of keeping rates low for longer, given the uncertainties surrounding UK and global growth.
The minutes from the central bank's rate-setting Monetary Policy Committee's (MPC) Oct. 9 meeting will be watched for more of that dovish tone on Wednesday.
Talk among analysts that another member of the nine-strong MPC might have swung to vote for higher rates has largely evaporated. Two members had backed a rate rise at the September meeting but now there is speculation they might switch votes.
Investors are also becoming increasingly wary about political risks in Britain, which they say could have a bearing on investment flows and sterling.
The latest polling has showed growing support for anti-EU party UKIP, whose leader said he would demand an immediate referendum on European Union membership as his price for supporting any coalition government after a parliamentary election due in May.
"As we get closer to the election next year, and as the Fed (U.S. Federal Reserve) readies to hike interest rates, sterling could trade in the low $1.50s range," said Tan.
A report on Monday by economic forecasting firm EY ITEM Club said business investors are getting more worried about political risks in Britain, and predicted growth in business investment next year would slow to 5.8 percent from 9 percent in 2014.
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