Sterling has continued to draw support from a weaker US dollar trend while the general improvement in international risk appetite has also been a positive influence as banking-sector sentiment stabilises. Overall, risk appetite and Sterling confidence is liable to stall relatively quickly with tough near-term resistance around the 1.4250 area against the dollar.
In its quarterly report, the Bank of England warned that many households could face a debt and deflation trap. The comments will reinforce expectations that the central bank will push ahead with an aggressive quantitative easing policy.
The international perspective will also remain very important for the UK currency. There will be increased speculation that the US Federal Reserve will move towards buying government bonds and there will be increased pressure for the ECB to take more aggressive and non-standard policy action.
The Bank of England quantitative easing will still be an important risk threat to Sterling, but any additional moves by other G7 banks would certainly limit the UK currency risks and offer important downside protection.
Sterling found support below the 1.39 level against the dollar on Monday and then rallied sharply to highs above 1.42 while it also made ground against the Euro. Near-term moves will remain correlated strongly with degrees of risk appetite
The latest UK unemployment data will be watched closely this week. If the labour market does not appear to be deteriorating any faster than in other major economies then Sterling may continue to gain some support. In contrast, any monthly increase above 100,000 would tend to undermine the currency.