Sterling weakened sharply on Tuesday. As well as domestic fears, the Bank of Canada decision to cut interest rates increased speculation over a UK move this week.

Conditions within the services and financial sectors will be very important for market sentiment and policy. In this context, there will be further concerns over potential damage from the credit squeeze, especially as Libor rates remained at elevated levels on Tuesday with 1-month Sterling rates now a full 1.0% above the official base rate.

The Nationwide consumer confidence index dropped sharply in November to 86 from 98 previously which reinforced growth fears and pushed Sterling back towards 2.0550 against the dollar on Wednesday. HBOS also reported a further 1.1% drop in house prices for November which reinforced negative sentiment and pushed Sterling to lows below 2.04 against the dollar.

The PMI report for the services sector fell to 51.9 from 53.1 the previous month. This data will be particularly important as MPC members have stated that survey evidence will be a key factor in determining near-term policy decisions. The weaker result will increase pressure for interest rates to be cut.