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There is an increasing threat that speculative inflows into Sterling will not be supported by the fundamental position which would risk a very sharp Sterling correction weaker.

Sterling pushed to highs just above the 2.06 level against the dollar in early Europe on Monday before consolidating close to 2.0575 later in US trading. The UK currency strengthened to 0.6705 against the Euro as sentiment remained strong and the currency pushed stronger again in Asian trading on Tuesday with a move above the 2.06 level against the dollar.

The latest CBI industrial survey recorded a sharp drop in the orders component to -6 in July from +8 the previous month. There was also a deterioration in the production and export orders components while the pricing evidence was also weaker. The survey will increase fears over damage from Sterling strength.

The UK currency will continue to gain near-term support from a flow of funds into high-yield currencies, especially with momentum plays encouraging further buying support. These flows are likely to be increasingly unstable given that markets are tending to ignore fundamentals.

Source: Investica

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