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Short covering helps Sterling close higher

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21 April 2008 @ 10:36 am EST

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Sterling recovered against the dollar on short covering and due to speculation that the plan to ease mortgage market conditions would limit the scope of UK rate cuts.

But data showed a fall in UK house price measure to its lowest in 30 years which increased the worries about that sector and the economy adding pressure on cable. Weak CPI data also dampened the traders sentiments.

According to Royal Institution of Chartered Surveyors net balance of UK house prices fell to 78.5 in the three months to March its lowest since the survey began in January 1978.

Sterling had been under pressure against the dollar after the Bank of England cut rates by 25 basis points. The bank s decision affected the concerns on credit conditions in UK.

However BOE decided to limit cut in 25 basis points because of optimism about the economy after the latest batch of bank write downs.

The UK purchasing managers index of the services sector for March came in at a level of 52.1 below February's level of 54.0 according to the release by the Chartered Institute of Purchasing Supply.

Concerns about European exposure to the US sub prime mortgage crisis remained as Swiss banking giant UBS and the Deutsche Bank disclosed a combined $23 billion of write downs for the first quarter ahead of their scheduled first quarter earnings announcements.

Bank of England Governor Mervyn King had said that the central bank was facing the challenge of balancing the possibility of weaker growth due to the credit crunch with higher inflation pressures has been weighing on cable .

Britain risks the prospect of a US style crash in its house prices as the credit crunch in the financial markets takes its toll of a heavily over valued property market the International Monetary Fund warned on Sunday.

Last day in spot trading sterling closed at 1.9975 (1.9904) against the dollar after trading in the range 1.9997 1.9880.

Medium term outlook

Trading below 2.0000 is the sign of weakness. Supports are 1.9800 1.9600 1.9385 resistances are 2.0275 2.0400.

Last day DGBP traded in the range 199.2 198.18 and closed at 198.73.

Sterling daily chart (spot)