LONDON: Sterling eased against the US dollar and pulled back from a one-month high against the euro on Thursday, with sentiment broadly cautious after ratings agency Fitch joined Moody's to warn about a possible downgrade to Britain's top credit grade.
Fitch revised Britain's outlook to negative from stable in light of a "very limited fiscal space to absorb further adverse economic shocks."
That warning came just a week ahead of Britain's budget and reinforced expectations that finance minister George Osborne is likely to keep fiscal policy tight to ensure that Britain does not lose its prized AAA rating.
Some said Fitch's move would raise a question over whether safe-haven inflows into gilts by investors exiting the crisis-ridden euro zone would continue. These inflows have been lending support to the British pound.
Sterling was down 0.2 percent at $1.5645 with bids at $1.5620 and some traders citing option barriers at $1.5600 that could check the currency's near term losses.
The euro rose 0.4 percent to trade at 83.40 pence , recovering from a one-month low of 82.955 pence struck on Wednesday. Traders reported offers at 83.50 pence.
"The Fitch warning is weighing on cable," said Adrian Schmidt, FX strategist at Lloyds TSB. "Sterling has broadly outperformed other currencies against the dollar in the past few days, so there is a chance that cable could play catch up and ease towards $1.55."
The dollar has risen against most major currencies this week after the Federal Reserve appeared less dovish than expected at the end of a regular monetary policy meeting, leading to a repricing of interest rate expectations.
The rise in Treasury yields along with an improvement in US data has supported the US dollar and led to a sell off in the yen, the Swiss franc and higher-yielding currencies like the Australian dollar.
While the dollar has gained 1.6 percent against the yen so far this week, it has risen 0.8 percent on the Swiss franc, while the Aussie has lost 0.7 percent against the greenback. Sterling, however, has been broadly flat so far this week.
The pound's resilience against the dollar has been helped by a recent improvement in some data such as retail sales and house prices. That has lessened fears that Britain will slip into recession and of the need for further monetary easing by the Bank of England.
Unemployment data out on Wednesday was less encouraging - holding at a 13-year high and serving a reminder that Britain was still struggling and might need another dose of stimulus.
However, the warning by Fitch dimmed the chances of additional spending in Wednesday's budget, said analysts.
"Any thoughts in some parts that the Chancellor might be tempted to embark on a bit of a budget giveaway next week as a result of coming in under his borrowing forecasts for 2011 are very likely to be put to one side after Fitch's warning," said Michael Hewson, senior market analyst at CMC Markets.
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