Wednesday€™s Bank of England comments will tend to renew fears over the government debt outlook. In this environment, there is the threat that confidence in the UK economy and currency will tend to weaken. Sentiment should still prove to be broadly resilient which will limit losses unless there is a substantial deterioration in international risk appetite. Sterling faces a test of important support near 1.62 against the dollar. Support should hold initially, but is liable to break by early next week with a move to 1.5960.
Comments from Bank of England officials again had a significant market impact. Bank Governor King and other MPC members were very cautious over the economic outlook with King repeating comments that the recovery was liable to be protracted while there was a very high degree of uncertainty over the outlook.
He again warned over the fiscal position and called for the government to tighten policy if there was any sign of economic recovery. The outlook, together with stresses between the bank and government, will tend to undermine sentiment to some extent.
Sterling retreated to 1.64 against the dollar due to measured independent selling and the firmer US currency with the trend continuing on Thursday with lows below 1.6250.