Political tension dents pound’s rise ahead of quarter end

The pound fell at the end of the week against both the pound and the euro after the lack of trust between the Bank of England and the government was blown open by the testimony of Bank of England Governor, Mervyn King, to the Treasury Select Committee on Wednesday but the real test for sterling comes next week.

King complained about the size of the government debt, which he labelled "extraordinary" and said that it should be reduced faster than the government planned. He also revealed that he has not been consulted over plans for the reform of banking regulation.

The news of this fiscal tension caused the pound to decline by 0.75% this week against the dollar to $1.637 and by 1.08% against the euro to €1.170 over the same period.

"The pound was unsettled by news of the communication breakdown between the Treasury and the Bank but next week will determine whether it is just a setback," says Alex Dunn, senior trader at Caxton FX, the leading foreign exchange broker. "We will get figures on the current account and new figures on the housing market from the Nationwide and Halifax. This will give us a clearer indication of the UK's financial position and whether we really are over the worst in economic terms. In addition it is the final week of the second quarter and traders may book profits on foreign exchange deals, which could lead to volatility in the markets."