An easing of panic should provide some Sterling support, but it is unlikely to make much headway

Sterling was unable to make any significant headway against the Euro on Wednesday and dipped to lows around 1.9465 against the dollar. UK currency moves are still being influenced strongly by carry trades and a Wall Street rally pushed the UK currency back above 1.9550. Sterling was finding it difficult to extend the recovery on Thursday as UK sentiment remained very fragile.

Despite the inflation warnings, there is a strong probability that the Bank of England will act to cut interest rates at the February meeting, but markets will be concerned that inflation fears will prevent the bank from cutting rates fast enough to prevent a serious deterioration in the economy.

The latest BBA mortgage approvals data recorded a decline to 42,100 in December from a revised 43,900 the previous month. The data is consistent with a sharp slowdown in the housing sector which will maintain a lack of confidence in the economy.