Sterling was undermined on Friday by rumours that Barclays Bank would be forced to announce substantial sub-prime mortgage-related losses which undermined confidence towards the UK financial sector. Carry trades also came under pressure which undermined Sterling as high-yield currencies retreated sharply. From highs above 2.1150. Sterling weakened to 2.09 against the dollar

The trend continued in Asian trading on Monday with the UK currency hitting lows below 2.08 against the dollar and hitting a 35-month low against the Euro near 0.7040. Banking-sector developments will continue to be watched very closely in the short term.

The UK producer prices data recorded a further 1.8% increase in input prices for October while output prices were also above expectations with a 0.6% monthly increase. Core prices wee still under reasonable control with a 2.3% annual increase, but the Bank of England will need slightly greater evidence of weaker growth to sanction a rate cut, especially if there is a high CPI figure on Tuesday. This week’s releases will be very important for Sterling. The Bank of England’s inflation report, due for release on Wednesday, will also be very important for near-term interest rate expectations.