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Daily FX Commentary

Wed, Mar 25 2009, 15:40 GMT

Investica Ltd


Sterling on a tightrope

The UK inflation data released on Tuesday will tend to increase Bank of England caution over an even more aggressive monetary policy and any shift in policy stance towards the currency’s level may tend to support Sterling.

There will also, however, also be the risk a further deterioration in medium-term sentiment towards the economy with the possibility that Bank of England credibility will be damaged.

The central bank warned that the government should not boost fiscal policy significantly further in the forthcoming budget given the debt stresses and rapidly rising budget deficit. The warning will tend to undermine currency support given that fiscal fears are already an important factor in damaging sentiment.

Sterling peaked at a six-week peak near 1.4780 against the dollar before correcting weaker while it also appreciated to 0.9170 against the Euro. Sterling weakened back towards 1.46 against the dollar on Wednesday and also dipped to 0.9260 against the Euro.

The potential vulnerability was illustrated by the latest gilt auction as the bid/cover ration weakened to 0.93 from 2.03 at the previous auction. The very poor result will increase fears over structural vulnerability and weak capital inflows.

Published on  Wed, Mar 25 2009, 15:41 GMT


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Investica Ltd http://www.investica.co.uk | tim.clayton@investica.co.uk

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