Sterling slips back towards 7-month low

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 spending 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 interest 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 positive" Morgan Stanley (Xetra: 885836 - news) 's European head of G10 currency strategy, Ian Stannard, said.

"But ... 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 0.1 percent on Thursday in trade subdued by the U.S (Other OTC: UBGXF - news) . Thanksgiving holiday, to $1.5118. That took it less than a cent away from this month's 7-month low of $1.5027.

"I still see sterling as being a bit overvalued up here," FxPro chief economist, Simon Smith, said. He said he saw the pound as more fairly valued below $1.50.

"If you look at the interest rate markets, they're suggesting that the Bank of England is not going anywhere soon."

Against the euro, which was weakened by increasing expectations that the European Central Bank would cut its deposit rate even further into negative territory at its meeting next week, sterling was flat at 70.20 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.

"With (Other OTC: WWTH - news) the euro zone crisis abating ... sterling's safe haven status is becoming of far less relevance to investors," Bank of New York Mellon strategists wrote to clients.

"With commodity prices coming under renewed downward pressure, the Bank of England may well find it difficult to hike rates in 2016," they said. "It (Other OTC: ITGL - news) looks to us as if 2016 will be the year that sterling finally loses its shine." (Editing by Louise Ireland)