The UK government debt position will inevitably remain a key focus with the latest government budget due on Wednesday. Underlying unease over the fiscal position will also certainly continue and confidence in the economy will remain weak, especially with doubts over the housing sector. Sterling rallies will quickly attract selling interest given the fundamental lack of confidence and a drift weaker is realistic over the next 24 hours. It is still doubtful whether there is immediate value in selling the UK currency below 1.4920 against the dollar given the number of short positions already in the market. The best strategy also looks to be to scale back short positions immediately ahead of the Wednesday budget.
Sterling remained trapped below 1.50 against the dollar ahead of the US open on Monday. There were also renewed doubts over the banking sector which unsettled the currency. The stock market rallied firmly from intra-day lows which helped support Sterling, especially as international risk appetite also stabilised.
Bank of England Governor King was generally cautious over the economy in comments on Monday which will tend to dampen sentiment. The inflation data will be watched closely on Tuesday and a higher than expected figure could trigger additional Sterling volatility as any initial gains may not be sustained.
The government-debt position will also inevitably remain a key focus ahead of Wednesdays budget. Underlying confidence will remain extremely fragile, but further selling pressure may be contained.
Sterling weakened back towards 1.50 against the dollar on Tuesday. The headline consumer inflation rate was slightly lower than expected at 3.0% from 3.5% the previous month which was marginally below expectations and will tend to undermine Sterling slightly. In the near term, budget trends are liable to dominate.