Looking back at last week, currency markets closed on Friday with a rather negative tone and price movement with Sterling was no exception. The recent budget report was supportive of a recovery of Sterling and its current cheap valuation should provide support to the currency, however currency markets suggest otherwise and the risks to the UK’s growth outlook may cause Sterlings recovery to be slow.

Bank of England Deputy Governor Paul Tucker said in an Interview today the British economy was not yet ready to cope with tighter monetary policy. Tucker said the recovery would be “bumpy and “uneven” because of “reasonably strong” headwinds, despite a strong rebound from an 18-month recession at the start of this year.

He said it was the Bank’s mandate to make sure that Britain avoided a double-dip recession which some analysts fear because of severe government spending cuts, strained credit conditions and wider risks to the global economic recovery.

“Earlier in the year, I had expected — half expected perhaps — that by this time in the year the Bank of England would start to withdraw the monetary stimulus we had provided to the economy,” Tucker told business leaders in London. “That seems to me, in terms of my own personal vote, rather less likely now than it was.”

The BoE’s Andrew Sentance continues to call for higher interest rates as he feels that the UK economy and global conditions are improving. However, such a move seems highly unlikely near term with the tone of the minutes of the last MPC meeting (released on Wednesday) indicating that the rest of the BoE is in fact moving towards further policy easing. Recent data also call into question the outlook for the economy, with retail sales for September coming in well below expectations for the second month running.

Sterling hit a six and a half month low versus the euro following the release, with the single currency now pushing towards the Stg0.89p level. Sterling did claw back some ground overnight but remains vulnerable. Versus the dollar, meanwhile, sterling also lost ground and is now well below last week’s highs of $1.6104.

After slipping back towards $1.39 late yesterday, the euro saw modest gains versus the dollar overnight but activity was confined to relatively tight ranges. The yen also moved higher but in a tight range, with little in terms of fresh news to provide direction. Indeed, many market players turned cautious going into the weekend, with tensions building as finance ministers from the G20 group gathered in South Korea for meetings over the weekend.

With the exception of the German Ifo index for October, there are no data releases of note from either the US or the eurozone today. The index is expected to ease back modesty from last month but still remain at levels consistent with relatively strong growth.

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Tom Trevorrow

Senior Trader

Tel: +0044 1736 335264

Email:tom.trevorrow@torfx.com