British pound heads for second weekly gain after UK household support package

LONDON (Reuters) – The British pound looked set for a second weekly rise and was close to a one-month high on Friday, helped by a large government spending program to support households and which economists said should support the short-term economy.

The government on Thursday announced a windfall tax of 25% on the profits of oil and gas producers to help fund a 15 billion pound ($18.9 billion) support package for households struggling to cope with soaring energy bills.

The reaction in the currency markets was muted, but analysts said signs of government support, which mainly targeted low-income households, could boost sentiment towards the pound which has rebounded against the dollar this week. after falling to a two-year low earlier this month.

The British Pound’s rebound was also helped by a broad reversal in the US currency, while the UK currency’s performance against the Euro has been much weaker in recent sessions.

As of 0800 GMT, the pound was up 0.1% at $1.2618 after hitting $1.2666 earlier. It is on track for a 1% gain this week.

Against the euro, the pound was slightly higher at 85.06 pence, but that followed a drop on Thursday.

“If the transmission of looser UK fiscal policy…is slightly tighter monetary policy – as a number of forecasters have suggested – then the current composition of (largely imported) inflation is influenced by a pound stronger, all things being equal,” said Simon French, chief economist at Panmure Gordon.

MUFG analyst Derek Halpenny said the package unveiled this week would help offset the impact on real incomes of an expected rise in the energy bill in October. He expects this will likely lead the Bank of England to change its recent “very gloomy forecast” which predicted no growth for the rest of this year and contraction in the fourth quarter and into 2023.

The Bank of England could therefore be encouraged to raise interest rates beyond the two 25 basis point hikes forecast by the MUFG, Halpenny said.

But with 125 basis points of hikes forecast for 2022, he doubted this week’s package would boost rate hike expectations, meaning the “impact on the pound will be marginal”.

(Reporting by Tommy Wilkes; Editing by Susan Fenton)