Confidence in the UK economy will remain weak in the short term with fears over a double-dip recession. These fears will be particularly damaging given that there will also be a further negative impact on the government budget and debt positions if the economy deteriorates again. There are likely to likely to be net capital outflows and it is certainly possible that there will be a much of serious loss of confidence which could trigger heavy selling pressure on Sterling. Near-term recoveries against the dollar are liable to be capped around 1.5540 with losses to at least 1.52 still realistic over the next two weeks.
Sterling confidence remained weak following the government-borrowing data on Thursday and the currency was subjected to further selling pressure in Europe on Friday.
The latest UK retail sales data was significantly weaker than expected with a monthly 1.8% decline compared with expectations of a 0.5% fall. The data is likely to have been distorted by tax changes and poor weather during the month, but there was still increased fear over a renewed downturn in the economy which depressed Sterling.
Underlying confidence also remains very weak on structural grounds as government borrowing levels remain a serious market issue. There will be the risk of further selling pressure on the currency if speculation over a credit-rating downgrade intensifies.
Sterling weakened to a fresh 9-month low near 1.5350 against the dollar, but then found support from a general unwinding of long dollar positions and moved back to near 1.5450 later in the session. The UK currency was still generally weaker on the crosses and dipped to 0.88 against the Euro on Monday.