Fundamentals

The UK banking-sector plans should provide some degree of support to Sterling, especially as there will be net investment flows. Confidence will remain very fragile given the severe economic fears.

The Sterling trading pattern was similar to that in recent days and it weakened again against the dollar once European trading wound down. The UK currency, however, rallied again late in New York as Wall Street erased its losses with volatility extremely high.

Over the weekend, the government accelerated its plans to inject capital into four main UK banks with potential stakes of GBP45bn. the government will underwrite capital-raising attempts and will take large stakes if the private funding is not forthcoming. There was a Sterling relief rally on hopes that faster action would improve confidence towards the banking sector and stabilise credit conditions, but economic fears will remain very high.

The UK inflation data would have been important this week, but the significance has been reduced sharply by the intense stresses in the credit and equity markets. There will be further pressure on the Bank of England to cut interest rates again quickly to help restore market stability with strong expectations of a further cut at the November meting, if not earlier. Relief dominated on Monday with the UK currency rallying to above 1.72 against the dollar