Confidence in Sterling will remain weak in the short term with the implications of falling bond yields and fears over the UK financial sector remaining negative factors. Severe weakness elsewhere, will limit selling pressure, but Sterling is liable to re-test January lows near 1.35 over the next week.

Sterling found support below 1.42 against the dollar in Europe on Friday and pushed to a high just above 1.43 following the US data. The UK currency was unable to sustain the gains and weakened sharply back to 1.41 later in US trading while Sterling also dipped to test levels near 0.90 against the Euro.

Following sharp losses on Thursday, the UK stock market attempted to rally on Friday, but gains stalled quickly which limited Sterling support, especially as there was renewed downward pressure on the financial sector. There were also underlying fears over the impact of quantitative easing on the medium-term currency outlook with reduced yield support for gilts.

The Lloyds banking group confirmed that the government would have a 65% stake following the new loan guarantee programme. The UK stock market was subjected to further pressure on Monday with financials again under pressure following the Lloyds announcement with the UK index at fresh 6-year lows.

Sterling initially held close to 1.41 on Monday as risk appetite remained very fragile and then weakened sharply again to test levels below 1.40 as yields on government bonds continued to decline with lows below 1.39.