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Sterling continued to wriggle higher yesterday against the euro and dollar in quiet market conditions. GBP/EUR was however unable to hold an important support level at 1.1018 and has fallen back into the 1.09s since. The pound also rallied against the dollar posting an intraday high of 1.6475, a level not reached for nigh on 3 weeks.

Mervyn King’s speech overnight, whilst grabbing headlines, has had little effect on FX markets. It was more dovish than expected but also safe in its growth expectations: in other words we learnt little from his speech.

Another piece of writing that will have Mervyn King’s fingerprints all over it and will affect GBP today are the latest minutes from the Bank of England. We are predicting unanimous votes for holds on both quantitative easing  and interest rates although any talk of deposit rate cutting could see GBP sell off. This is due out at 09.30.

Dollar was helped yesterday against some of the crosses that it has performing badly on recently. CAD weakened after the minutes from its own central bank proved to be more dovish than expected. The European single currency also slid back from close to the 1.50 level as fears of excessive EUR strength came to the fore. Brazil did the most by installing capital inflow controls to stop the real gaining at the dollar’s expense. As one journalist put it “Other countries, it appears, have more to lose from a weak dollar than the US does”.

We still forecast USD weakness going forward and according to economist Bernard Connolly, the US may face a series of asset price bubbles and a rerun of the financial crisis unless it lets the USD fall at least another 25% on a trade weighted basis.

Apart from the BOE minutes we have UK CBI industrial trends at 11.00 and the Fed’s Beige Book at 19.00.

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