NEWS / Foreign Exchange

Daily FX Commentary

Data revives Sterling fears

Sterling was unsettled briefly on Friday by rumours that Bank of England governor King was set to resign but then pushed back to new 26-year highs in late US trading with a peak near 2.09 as the UK currency regained losses against the Euro. The UK currency initially held firm on Monday as weak dollar sentiment persisted before weakening after the UK data.

Unease over financial-sector trends is still likely to be a significant negative Sterling factor if credit-related stresses intensify, especially as capital account trends are liable to be less favourable despite the current optimism. The dropping of a Qatar-based bid for Sainsburys will reinforce fears over near-term trends.

UK industrial production fell 0.4% in September while there was a 0.6% drop in manufacturing production. The CIPS index for the services sector also weakened to 53.1 in October from 56.7 the previous month and the extent of the drop will cause some concern. Expectations that interest rates will be left on hold for November has been supporting the currency over the past week despite the generally weaker economic data flow. The latest releases are liable to increase expectations that rates will be cut before the end of 2007 and this will be a negative Sterling factor.