Sterling pulled back from a one-month high versus the euro and struggled against the dollar on Thursday, with investors cautious after ratings agency Fitch joined Moody's in warning of a possible downgrade to Britain's triple-A credit rating. Fitch revised Britain's outlook to negative from stable in light of a "very limited fiscal space to absorb further adverse economic shocks."
The move 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 top-grade rating. Some said Fitch's move would raise a question over whether safe-haven inflows into gilts as investors switch out of the crisis-ridden eurozone would continue.
The euro rose 0.3 percent to trade at 83.38 pence, recovering from a one-month low of 82.955 pence struck on Wednesday. Traders reported offers at 83.70 pence and at 84 pence which would keep the euro's gains checked. "If you look at the UK on the fiscal side there is relatively little topside potential for sterling and I think all the good news has been priced in terms of fiscal austerity," said Daragh Maher, currency strategist at HSBC.
Sterling was down 0.1 percent at $1.5660, having slipped to a session low of $1.5634 with bids at $1.5620. Some traders cited option barriers at $1.5600 that could check the currency's near term losses. 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 has however gained some support since slipping to 6-week low of $1.5603 on Monday.
"The Fitch warning is weighing," said Adrian Schmidt, FX strategist at Lloyds Banking Group. "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. The pound has been helped recently by an improvement in some UK data such as retail sales and house prices. That has lessened fears Britain will slip into recession and reduced expectations of further monetary easing by the Bank of England.
BoE policymaker Ben Broadbent said on Thursday there were still big concerns about the global economy. He added that, despite high household debt, UK interest rates may have to rise if overseas risks have reduced, and British banks' funding conditions have eased. In a reminder to investors that the UK economy was struggling, however, unemployment data on Wednesday showed the jobless rate holding at a 13-year high and keeping alive the chance that there may need to be another dose of stimulus.