There will continue to be major concerns over the underlying UK government debt position. The risks to Sterling will intensify if there is a wider loss of confidence in the international financial sector as this would expose the UK banking sector to a renewed loss of confidence and fears that further UK government support will be required. Sterling will gain some relief if global risk appetite stabilises, but rallies will soon attract selling pressure. Near-term, look to sell at 1.65 against the dollar.
Sterling was undermined by an overall deterioration in risk appetite on Friday, but there was some recovery in confidence later in the New York session. MPC member Posen stated that true recovery in the economy would not be achieved without further reform of the banking system and this will maintain fears over the UK’s underlying financial position.
The latest housing data recorded a small increase in prices for November according to the latest Rightmove survey, but consumer confidence weakened while the CBI also estimated a contraction in services-sector output for the three months to November which will maintain fears over the sustainability of the recovery. The PMI data is liable to be watched closely this week for further evidence on the economic trends. Any downturn in the indices would be significant in further undermining overall Sterling confidence. The UK currency stalled close to the 1.65 level against the dollar, but did find support beyond 0.91 against the Euro and held firmer against the dollar on Monday.
The UK lending data remained weak with a further contraction in consumer credit. Indeed, there was the sharpest decline on record for consumer credit since the current series began in 1993. With the consumer and banking sectors under pressure, a sustained recovery remains unlikely.