While risk appetite remains stronger, there will be support for Sterling, especially as confidence in the US and Euro-zone fundamentals remains very fragile. Given the underlying UK debt fears only a small shift in sentiment could trigger sharp selling pressure. Nevertheless, in the near term, retreats should still attract strong support as markets continue to attack resistance levels above the 1.60 level against the dollar. There is now an increased risk of a stop-loss driven surge to 1.6170 before a substantial correction weaker.
Sterling found significant buying support below 1.58 against the dollar on Tuesday and rallied back to above 1.59 later in New York. It fluctuated around the 0.88 level against the Euro with a firmer tone.
The UK currency moves were again influenced strongly by degrees of risk appetite and the currency gained ground later in US trading on Tuesday when international equity markets rallied strongly.
Bank of England MPC member Besley stated that the government budget position would have to be tackled in the medium term, while there was some short-term room for manoeuvre. Underlying debt fears will still be an important underlying issue for the currency and fear would return quickly on a run of bad data.
The improvement in risk appetite was still the dominant issue with the UK currency pushing to a six-month high on a trade-weighted basis and challenging levels above 1.60 against the dollar.