Sterling Risks in Focus

Sterling faces important domestic risks with the annual budget releases on Wednesday. The government has very little room for fresh options and the deficit forecasts are likely to spook the markets. The international perspective will also need to be watched closely and the downside Sterling risks will increase substantially if there is a renewed deterioration in risk appetite. In particular, the US banking-sector stress tests will pose significant risks. Overall, the deterioration in confidence should be measured and this should also curb aggressive Sterling selling. There is scope for a near-term correction from 1.4510 against the dollar, but there is little underlying value until at least 1.43.

Fiscal policy uncertainties will be an important feature this week with the annual budget release on Wednesday. Trends in the global banking sector will also continue to be watched very carefully over the next few days and any increase in fears surrounding the US sector would tend to undermine the UK currency. The CBI forecast that 2009 GDP would decline by more than expected, but it was optimistic that the worst of the decline was now over which will limit the impact.

The UK currency was little changed against the Euro at close to 0.88 while Sterling dipped to lows near 1.4750 against the dollar. The underlying trend continued on Monday with Sterling edging slightly lower against the dollar while it held firm against the Euro. The UK currency lost ground in Europe as fiscal fears increased despite a reported rise in house prices for April by Rightmove.

Investica
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