Sterling Support Will Ebb Away Now. By Nicholas Hastings

There's no excuse for not selling sterling now.

As even the Bank of England governor has implied, the U.K.'s economic recovery is still far from secure and further monetary easing might yet be necessary.

At the same time, credit conditions in the financial world remain poor and the pound remains vulnerable to another shake-out in the banking sector.

Look at the U.S. The fifth largest banking collapse in its history - Colonial Bank - only took place last week.

But, it is the impression that, despite some scattered signs of an economic upturn, the state of the U.K. economy remains dire enough for further quantitative easing to still be on the Bank of England's books for as early as November.

The bank's decision to increase bond buying by GBP50 billion earlier this month had already shocked sterling bulls.

Now, minutes showing that three of the nine members of the policy committee, including Governor Mervyn King, had voted for a GBP75 billion increase, suggest that the central bank's assessment of the economy remains considerably less upbeat than the assessment of financial markets.

As a result, speculation of another increase in quantitative easing is only likely to rise - undermining any early monetary tightening hopes that sterling bulls may have been harboring.

Even news earlier this week that U.K. inflation is proving stickier than expected is unlikely to help the pound at this stage. In fact, analysts are already dismissing the strong consumer price data, suggesting that inflation will fall back again in line with lower energy prices over the next few months.

Retail sales data later Thursday are also unlikely to play into the hands of sterling bulls. Even if the figures fail to show sales turning out flat during July, the market will probably see any increase as due to price cuts rather than an underlying improvement in consumer demand.

A reminder that risks to the U.K. banking community remain won't do much to help the pound in weeks to come either. As analysts at Citigroup pointed out, there remains persistent weakness in bank lending with banks yet to repair their damaged balance sheets more fully.

"This matters for sterling, given its close trading relationship with financial stock performance," the analysts warned.

Click Image to Enlarge


Early Thursday in Europe, the pound was getting some help from the latest rally in equities - suggesting that investors were willing to move back into more risky asset markets. Sentiment was being boosted by a rise in crude oil prices to 2-week highs as well as a rebound in base metal prices.

However, some analysts suggested that the rise in stock prices represents more of a technical bounce rather than renewed confidence in the global recovery.

By 0645 GMT, the pound had risen to $1.6572 from $1.6507 late on Wednesday in New York, according to EBS.

The dollar rose to Y94.48 from Y93.85 while the euro rose to $1.4241 from $1.4219. The single currency was also up at Y134.55 from Y133.46.

In Japan, the Nikkei rose 1.8% and, in China, the Shanghai Composite gained 4.0%. This followed on from the 0.7% rise posted by the Dow Jones Industrial Average on Wednesday.