Fresh UK bank support measures will intensify longer-term budget and funding fears which will severely curb any positive Sterling impact.
The UK currency pushed rapidly higher to a peak near 1.50 against the dollar on Friday, but failed to sustain the advance and dipped sharply in late European trading. Sterling also retreated back to 0.90 against the Euro from a peak near 0.8850.
There were increased fears over the banking sector which helped trigger renewed selling pressure on the UK currency. In particular, there was a loss of confidence over Barclay’s capital position. The financial sector will continue to be a very important short-term focus with the government announcing fresh support for the banking sector. There were also plans to set up a new GBP50bn programme for the Bank of England to buy securities in the market and this is effectively a move towards quantitative easing. This will tend to boost sentiment hat further deterioration can be avoided, but will also pose important longer-term Sterling risks.
The economic data will also be watched closely with a particular focus on the employment figures and MPC minutes on Wednesday while consumer inflation is set to decline sharply when the latest data is released on Tuesday. Overall sentiment is likely to remain fragile, but expectations of fresh banking support pushed Sterling stronger on Monday.