Sterling bounce could be short-lived

Risk currencies are off to a relatively flat start, although sentiment is vastly improved from the carnage we saw last week.

Sterling
Source: Bloomberg

Bond markets showed signs of stability in the US, with the 10-year yield rising 4 basis points in the US and Germany. This helped prop up the US dollar, which had struggled most of last week despite the ongoing tightening debate.

Cable has been an exception and is testing the $1.6100 level. The pound got a bit of a lift from comments from the BoE’s chief economist suggesting markets may have overreacted to some weak data recently. However, I’m not sure just how much further the pair can run before sellers flock back in.

While traders would want to buy into the notion the BoE could still hike earlier than expected, the recent deterioration in data is likely to take precedence. On the UK calendar this week, we have public sector net borrowing, MPC minutes, retail sales and GDP data. This puts the sterling in the spotlight with some volatility highly likely. There is a fairly big sell region between $1.6100 and $1.6200 – I wouldn’t be surprised to see the pair come under renewed pressure.

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