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Sterling rallied strongly but was unable to break the 1.10 level on Friday. As we predicted, heavy option and stop resistance kept sterling at arm’s length but there is a good chance of another run at it soon.

News over the weekend for the pound was not good. According to a report from Ernst & Young Item Club in the Sunday Telegraph GBP will be stuck at near parity against the EUR for up to four years. The report says that GBP could continue to weaken until 2014, as foreign investors balk at the unprecedented size of the UK’s budget deficit. While we are concerned that the levels and rate of increase of debt in the UK are unprecedented, we believe this to be a tad shrill and while downside sterling risks to remain 4 years at parity is nonsensical. This was followed by a prediction that we will see a ‘VW’ recovery and that GDP will ‘bump along the bottom’ for a good couple of years.

China’s GDP grew more than 7% in the first nine months, a senior official from the National Development and Reform Commission said, and would have no difficulty reaching the government’s full-year GDP growth target of 8%. In other news, China will be able to sustain the momentum of its current V-shaped recovery, setting the stage for stronger growth next year than in 2009.

US budget deficit soars to record USD 1.42trl 2009 fiscal year deficit compares with USD 455bln deficit a year ago.

Adam Posen, the newest member on the MPC stated in the Sunday Times yesterday that he, depending on the latest round of forecasting which is being carried out not, will probably vote for an increase in QE in November.

Today is quiet on the data front although the rest of the week is the complete opposite and volatility will be evident,

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