Underlying confidence in the UK economy will remain firmer, especially after the services PMI data. Markets have, however, now priced in a substantial domestic improvement and this will make it difficult for Sterling to extend gains. Similarly, although the UK currency will gain support while confidence in the global economy remains firmer, there is the growing threat of a substantial correction weaker given the international improvement priced in. Political stresses could also unsettle the currency to some extent. Overall, there is no real Sterling value at current levels against the dollar.
Sterling was undermined initially on Tuesday by reports that Qatar was looking to sell its stake in Barclays bank and Sterling weakened to lows near 1.6320 against the dollar. The UK currency then secured renewed strength later in the day due to a combination of dollar weakness and independent strength with a peak near 1.66 against the dollar. Sterling also challenged 2009 highs near 0.86 against the Euro and was just stronger than this level on Wednesday.
Sterling moves will also continue to be influenced strongly by degrees of risk appetite. With sentiment still robust and the dollar under pressure, the UK currency pushed to a fresh 7-month month high above 1.66.
The UK PMI index for the services sector rose to 51.7 in May, the first reading above 50 since March 2008 which will reinforce UK recovery hopes and help underpin confidence in Sterling. A wider dollar recovery pushed the UK currency back towards 1.65.