Focus on sterling Currency

The break back below the 1.70 level on cable yesterday reflected the extent of the dollar recovery seen during July, but also the more balanced view being taken towards the possibility of higher UK rates this year.  Weaker than expected retail sales also put downward pressure on the UK currency early on during yesterday’s session.  The focus this morning will be GDP data in the UK, seen rising 0.8%in the first reading of Q2 data at 08:30 GMT. Firmer numbers could give sterling the required lift back above the 1.70 level, but this could struggle to be sustained in the face of a continually firmer dollar.  Also in focus early on will be the IFO data at 08:00 GMT.  The headline index has fallen over the past couple of months and is expected to do so once again, from109.7 to 109.4.

In the wider picture, there are still concerns regarding the potential impact of sanctions on Russia from Europe which have yet to be played out.  As we mentioned yesterday, sterling could prove to be the more vulnerable currency should broader sanctions be implemented. Otherwise, the concern will be with energy and the impact of higher prices.  The dominance of the dollar over the past week could leave some risk of profit taking into the weekend, the kiwi and the Swissie having the greater upside potential in this scenario.