Euro Update – Sterling declined another 2 cents since last week’s special update

Sterling declined another 2 cents since last week’s special update. Mervyn King’s comments expounding the benefits of a weak pound continue to weigh on the market, giving traders little comfort in holding the currency. In other news, commentators are speculating that the Bank of England could introduce negative interest rates on bank deposits held at the central bank. By penalising the banks for holding large cash reserves the BoE would hope to stimulate bank lending and improve the pace of economic recovery. The downside for sterling however, is that such a move would likely prompt a fall in interbank interest rates (as there would no longer be an interest rate advantage to holding cash), making sterling even less attractive. The Swedish Riksbank has already done exactly that, pushing market interest rates down to just 0.25%.

Sterling traded below 1.08 before the London open Monday, recovering to end the session unchanged. Some analysts are predicting parity with the Euro by year end, which would mean another 8% downside in the exchange rate. The technical outlook remains negative, and the nearest noteworthy support level is around 1.05, the levels we bounced from back in January and March.