Sterling weakens as Brexit unease overshadows budget

LONDON (Reuters) - Sterling sank against the dollar and euro on Tuesday as concern about Britain’s departure from the European Union led investors to largely ignore hopes of an end to austerity raised by Chancellor Philip Hammond.

The pound has weakened 4 percent in October as traders fret over the lack of progress in divorce talks on issues including the Irish border, less than five months before Brexit.

Hammond’s budget on Monday offered a glimpse of higher spending after a decade of cuts to public services. But he made clear that this will hinge on London getting a trade agreement with Brussels.

“The market is certain that the British economy will only be able to benefit from the attested end of austerity announced yesterday if an orderly Brexit is achieved,” said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.

“An agreement does not seem to be any closer so there is still the threat of a no-deal Brexit... And that is all that matters for sterling at the moment.”

On Wednesday the pound fell 0.4 percent GBP=D3 versus a broadly stronger dollar to $1.2729, its lowest since Aug. 17. It also lost ground against an otherwise under-pressure euro, falling to a one-month low of 89.28 pence. EURGBP=D3

A no-deal Brexit would be likely to tip Britain into a recession that could last more than a year, credit ratings agency Standard and Poor’s said on Tuesday. S&P said its base case was still that London and Brussels would agree a withdrawal deal.

Sterling traders are turning their attention to the Bank of England’s monetary policy meeting on Thursday, when it is expected to keep interest rates on hold and detail conditions necessary for policy tightening.

“Were it not for Brexit, the BoE on Thursday would probably be providing guidance on a rate hike, possibly in February given the compelling evidence of rising wage growth,” MUFG analysts said in a note.

Reporting by Tom Finn; editing by John Stonestreet and David Stamp