There will be greater speculation over an increase in quantitative easing at next week's Bank of England policy meeting. In isolation, the Sterling fundamentals remain dreadful, especially with a government budget deficit above 12% of GDP this year. There will, however, be further protection from a lack of confidence in the other major economies while Sterling is also undervalued. In this environment, Sterling losses should still be measured on a near-term view and selling needs to be cautious. Overall, Sterling rallies against the dollar are likely to stall near 1.6450 with a move down to 1.61 then realistic.
Sterling dipped to below 1.63 against the dollar on Monday as underlying selling pressure persisted. The currency was undermined by generally dovish comments from former Bank of England member Blanchflower who stated that the amount of quantitative easing should be increased. Sterling, however, was able to find support near 1.6250 as selling pressure abated.
MPC member Posen suggested that the quantitative policy would not be inflationary. There is still likely to be a wide range of opinion on the appropriate central bank strategy and this will maintain the risk of volatile Sterling trading ahead of the Bank of England meeting next week.
There is also still scope for some protection from unease over European and US fundamentals, especially given the dire US financial position. Sterling held just above 1.63 on Tuesday before advancing to 1.6420 on another round of short covering.