Sterling slips back towards 7-month low despite upbeat forecasts

By Jemima Kelly

LONDON, Nov 26 (Reuters) - Sterling fell back towards a seven-month low against the dollar on Thursday, with upbeat UK forecasts and a spending review by the finance minister the previous day not changing the view that interest rates will not rise any time soon.

The pound had initially climbed on Wednesday after George Osborne's "Autumn Statement", in which he eased some cuts and dropped an unpopular plan to scrap some benefits for low-earners, as well as announcing a higher growth forecast of 2.4 percent for 2016.

But after a boost from those who had been concerned that more austerity would crimp growth and push out Bank of England rate hike expectations even further into the future, investors refocused on the bigger picture.

"Yesterday's speech had an initial positive for sterling. There were no negative headlines lurking there (and) the forecasts were fairly poisitive" said Morgan Stanley (Xetra: 885836 - news) 's European head of G10 currency strategy, Ian Stannard.

"But when we look at the overall picture, there's still very significant fiscal tightening taking place over the coming year, so the overall picture doesn't really change from this statement. So we're still bearish on sterling."

The pound fell 0.4 percent on Thursday to $1.5068, taking it close to the seven-month low of $1.5027 hit earlier in the month. Against the euro, it was down 0.2 percent at 70.33 pence.

Investors pushed back their expectations for when the BoE would start to raise rates to the end of 2016 after the bank's latest Inflation Report this month, when the bank sounded a dovish tone on inflation and warned of the deflationary impact of a strong currency.

"It (Other OTC: ITGL - news) is clear to most that sterling is no longer particularly undervalued, following six years of relentless gains," Bank of New York Mellon strategists wrote to clients. "It is also clear that with the euro zone crisis abating...sterling's safe haven status is becoming of far less relevance to investors."

"With commodity prices coming under renewed downward pressure, the Bank of England may well find it difficult to hike rates in 2016," they added. "Put simply it looks to us as if 2016 will be the year that sterling finally loses its shine." (Editing by Jeremy Gaunt)