Sterling will gain some respite from a firm CBI survey, but financial-sector risk will tend to remain dominant in the short term with further volatility

Sterling found support below the 2.00 level in early Europe on Tuesday and strengthened to highs above 2.0250. The UK currency also recovered to test resistance levels below the 0.78 level against the Euro during the day. A firmer dollar tone pushed Sterling back to 2.0050 later in New York.

The latest MPC minutes recorded a 7-2 vote for unchanged interest rates at the March MPC meeting. Blanchflower and Gieve both voted for a further rate cut and the vote of Gieve is important given his responsibility for financial markets. The majority were still concerned over the inflation trends. The latest employment data also recorded a reduced decline in unemployment of 2,800 for the month which will reinforce expectations of a weaker economy.

If financial stresses return quickly, there will also be further pressure on the central bank to sanction a near-term cut in rates. Rumours of difficulties at UK bank HBOS weakened Sterling again on Wednesday with lows below 2.00 against the dollar and a fall to 0.7870 against the Euro.

The latest CBI survey recorded an increase in orders to +7 from +3 with export order at a 12-yaer high which will boost confidence over competitiveness.