Following the Bank of England move to boost quantitative easing last week, there will also be speculation that the bank will take a downbeat tone in Wednesday€™s inflation report. Trends in UK banking will also be watched closely and any renewed weakness would undermine Sterling. The currency could still prove to be broadly resilient if global risk appetite holds firm, but net global and UK risks are liable to increase. Overall, a further decline to 1.6520 against the dollar is realistic and possibly 1.6345 ahead of Wednesday€™s report.
As the US dollar gained ground on Friday, Sterling dipped to lows around 1.6650, but regained ground against the Euro with a move back to the 0.85 level given wider selling pressure on the Euro.
Sterling is still being hampered by the Bank of England€™s decision to expend quantitative easing and the inflation report this week will be very important for UK currency sentiment. After edging higher to the 1.67 region on Monday, Sterling weakened, undermined in part by a media report over the deflation risks faced by the UK.
Former Bank of England MPC member Wadhwani warned that the economy could face very serious challenges over the second half of 2010 while there was speculation that Governor King will warn over the deflation risks in Wednesday€™s crucial inflation report.