Sterling will continue to gain protection if there is a sustained improvement in international risk appetite. There is, however, an increased risk that the short-term support is masking an underlying deterioration in confidence as debt fears remain a key influence. Overall confidence surrounding the UK fundamentals is liable to deteriorate which will expose it to heavy selling pressure if global confidence also falters. Overall, given the net risks, Sterling still looks set to weaken gradually in the near term with further selling pressure above 1.64 against the dollar.
The UK currency maintained a generally steady tone during Thursday as it remained resilient, but was unable to make any strong headway either. With the US dollar still on the defensive, Sterling was able to consolidate above the 1.64 level while it drifted slightly weaker to 0.8610 against the Euro.
The IMF warned that the UK government may need to take more action to stabilise the financial sector which undermined confidence to some extent and debt fears will continue to be an important background influence, especially with the IMF also warning over the budget position. The immediate impact will still tend to be limited while underlying risk appetite is still stronger with Sterling still influenced strongly by trends in global equity markets.
The currency will face a much sterner test if there is a deterioration in international sentiment and renewed pressure on the banking sector. Sterling edged back to below 1.64 on Friday in cautious trading with further consideration of the debt issue then triggering losses to below 1.63.