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Sterling Slides After UK Pre-Budget Report

8:08 AM
LONDON (Dow Jones)--Sterling tumbled Wednesday after investors questioned the feasibility of the government's forecasts for borrowing and spending in its keenly anticipated prebudget report to parliament.

Also overhanging the forecasts is the expectation that general elections will be held next spring, which is adding to the uncertainty over the U.K.'s outlook.

Sterling was initially little changed after Darling's presentation, but began to slide as New York trading got underway, and investors digested the details.

In mid-morning trading, the pound was at $1.6201, down from an intraday high of $1.6375, and below $1.6276 late Tuesday.

"Investors went in optimistically looking for a solution in terms of a four-year plan, and while they got it, there are not enough people who actually trust it will be followed through," said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Conn. "I'm not saying there is a credibility issue with what Darling delivered today, but the dawning political flux likely in 2010 detracts from his vision."

Some investors were also skeptical of Darling's growth projection for the U.K. economy, which in turn could undermine his outlook for bringing down the country's deficit and debt.

"His projections for GDP were seen as somewhat overly optimistic, so his forecast for deficit reductions become a little bit suspect," said Omer Esiner, senior market analyst at Travelex Global Business Payments. "If we see actual growth in the U.K. underperform those forecasts, then it suggests that the budget deficit and the dire state of public finances will continue to be an issue."

Despite forecasting an output contraction of 4.75% for 2009 - a larger contraction than the April budget prediction of 3.5% - Darling said the economy will return to growth in the fourth quarter and that in 2010, output will expand by 1.0%-1.5%, unchanged from the previous forecast. The economy will grow by around 3.5% in 2011 and 2012, he said.

As a share of gross domestic product, the prebudget estimates that net borrowing will fall from 12.6% this financial year, to 12.0% in 2010, 9.1% in 2011, 7.1% in 2012 and 5.5% in 2013. It falls to 4.4 in 2014,

-By Katie Martin, Dow Jones Newswires; +44 (0) 207 842 9346;; and Fabio Alves, Dow Jones Newswires; 212-416-2204;
By Katie Martin and Fabio Alves
Copyright 2009 Dow Jones & Company, Inc.

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