Sterling hit a six-month high against the US dollar, reaching $1.5963 in early trading, as confidence regarding the health of UK banks continued to improve. RBS commented that 'sentiment towards the UK financial system is one in which sterling can trade more strongly.' [1]  Positive momentum following HSBC's results yesterday, and the expectation that RBS and Lloyds will also unveil impressive results has continued to support sterling today. The UK currency held on to gains despite weaker domestic construction figures. The Purchasing Managers Index (PMI) for the UK construction sector for July showed a greater than expected fall to 54.1. Although the sector is still expanding, economists had forecast a 0.2 point fall from June's level of 58.4. The impact of the news was limited, however, as construction accounts for around 6% of national output. Separately, the UK Debt Management Office (DMO) announced that it had sold the full amount of bonds, ￡3.75 billion, for its 2.75% January 2015 gilt with a strong bid-to-cover ratio of 1.99. The DMO is well ahead of its issuance programme, having sold ￡75.6 billion of gilts out of a full year target of ￡165 billion in just four months. The successful sale indicates that markets remain confident of the coalition government's plans to cut the budget deficit. All else being equal, the latest developments are likely to provide further support for GBP/USD. Chris Beauchamp, London

 

Notes: Chart data sourced from Bloomberg. Source: [1] [2] Bloomberg Businessweek (3 August 2010), [3] Wall Street Journal (3 August 2010).