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The pound came under intense pressure last week falling to 1.10 against the euro and slipping against the USD. The pound has not been helped by wobbly risk sentiment, but the main damage seems to have been inflicted by an article in the Telegraph. The paper reported that Lloyds Banking Group has been forced to abandon it’s plan to withdraw from the Government’s toxic debt insurance scheme after failing to raise enough capital to meet the FSA’s strict requirements.

Among the other factors weighing on the pound; likelihood of early move by Bank Of England to cut deposit rate paid on bank reserves; likelihood of additional Quantitative Easing coming soon; and of course dire public finances. The recent rally in the FTSE will have provided the pound with some support- the concern is that if equities sell-off the pound could drop further. We need to see some consolidation over the next few trading sessions to support the pound; the better than expected public sector net borrowing data gave the pound a reprieve but we will need to see more good news to support the limp pound.

On top of the bad news surrounding the pound we have also simultaneously witnessed consistent euro strength against the USD pushing up over 1.47. This has helped to keep the euro strong across the markets and also against the pound. In an article over the weekend the Telegraph are pointing towards GBP/EUR hitting parity in the first quarter of 2010; whilst this cannot be ruled out we must consider that economic sentiment is very fickle at the moment and the tide can change very quickly. This week the Bank of England minutes will be closely scrutinized to asses on further or imminent QE measures from the Bank of England.
The USD has made a comeback against the EUR, AUD, JPY and GBP over the last trading session. Previous to this USD weakness seemed to be engrained into the markets as various factors converged to heap pressure on the USD. The recent USD strength coming back into play has been attributed to this weeks FOMC interest rate meeting in the US; the expectation is growing that the Fed will discuss exit strategies in the near future and this will signal a hawkish tone with the potential for interest rate rises to follow.

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