Fragile Sterling correction - 23-12-08

Sterling was unable to push back above the 1.50 level against the dollar on Monday and dipped to lows below 1.47 level the UK currency also re-tested record lows beyond 0.95 against the Euro. Confidence in the economy and Bank of England will remain weaker in the short term. Bank Deputy Governor Gieve, for example, stated that the bank was aware of the dangers posed by excessive bank credit, but did not take any additional action to curb excess borrowing.

Liquidity will weaken over the remainder of the year and this is liable to maintain erratic trading. There is the possibility of a paring of aggressive short positions which would trigger a correction for Sterling, but any rallies will quickly meet selling pressure given the severe lack of confidence in the currency.

GDP for the third quarter was revised down to a reading of -0.6% from the previous 0.5% and BBA mortgage approvals were weak at 17,800 in November which were at a record low and will reinforce fears over the economy, although the data suggested that the services sector rebounded in October. The current account deficit was lower than expected with a GBP7.7bn deficit after a revised GBP6.4bn shortfall the previous quarter which should also offer some relief.

Tim Clayton
Investica Ltd
E-mail: tim.clayton@investica.co.uk
+44 (0) 1452 781001