The Bank of England policy stance will have a very important short-term influence on Sterling. The UK currency will be vulnerable to sharp selling pressure if there is any further expansion of quantitative easing by the bank. A steady policy looks the more likely outcome which would provide some degree of relief for the currency and small initial gains. Overall confidence in the economy and currency is still liable to be weak and rallies are likely to attract selling pressure quickly. The UK currency will be much more vulnerable if there is any deterioration in confidence surrounding the banking sector. Overall, Sterling is unlikely to sustain rallies above the 1.60 level against the dollar.
There were no significant domestic developments during the day and there was also caution ahead of Thursday’s Bank of England meeting. Markets will be on high alert especially as the past few meetings have triggered a high degree of currency volatility with unexpected decisions on quantitative easing.
The most likely outcome looks to be for policy to be unchanged which would be likely to provide some degree of Sterling relief unless there is a negative statement. Any move to increase the amount of quantitative easing would be likely to trigger a sharp sell-off in Sterling. The UK currency was able to consolidate above 1.59 against the dollar later in New York trading and moved back to 1.60 0n Thursday as the US dollar remained firmly on the defensive.