Budget drives sterling higher vs struggling euro

LONDON: Sterling surged to a 10-week high against the euro and resisted the dramatic falls against the dollar suffered by other major currencies after a UK budget read as doing more than had been expected to bolster growth in years to come.

At the heart of the sterling rally was a rocketing of long-dated gilt yields after finance minister Philip Hammond ramped up his forecasts for government borrowing to the tune of an extra 122 billion pounds ($151 bln) over the next five years.

That drove the pound almost 1 percent higher to 84.83 pence per euro, its strongest since mid-September. At $1.2426 it was marginally higher against a dollar that gained 1.5 percent against the yen and almost 1 percent against the euro and a raft of other emerging and developed world currencies.

"Had this been an austere budget the pound would have sold off pretty sharply but that is not the case," said Stephen Gallo, a strategist with Bank of Montreal in London. "It has been subject to the dollar rally but it is outperforming the euro.

The US and the UK are headed towards looser fiscal policy which is growth-supportive, while the euro zone has virtually no fiscal maneuverability whatsoever."

Down by almost a fifth against the dollar over the past year, sterling has proven more resilient since the start of October, helped by signs the economy is doing better than many economists had feared after June's vote to leave the EU. The pound jumped above $1.25 on Monday after Prime Minister Theresa May pledged to address business concerns that Britain could fall off a "cliff edge" when it exits the European Union, hinting at some form of transitional agreement.

But sterling has struggled to push on since, and analysts are still divided over the broader outlook for the currency heading into the formal launch of Brexit talks next year.

Strategists at one of the market's most consistent dollar bulls, Deutsche Bank, forecast the pound to fall to $1.10 and 90 pence per euro next year.

"We expect the market to re-focus on the implications of a hard Brexit with the absence of fiscal stimulus, the back-loaded impact of a weak pound on household finances, and very negative current account dynamics," they said in a note on Wednesday.