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Sterling rallies over Citigroup news

Shares in Citigroup dropped sharply last week amid talk that the bank was set to be nationalised. But reports that the US authorities might instead take stake of up to 40 per cent in the bank boosted risk appetite and banking shares across the board. The pound got an additional boost as shares in Royal Bank of Scotland, the bank part-owned by the UK government, rallied on reports it was contemplating a major restructuring.

The pound rose 1.8 per cent to $1.4649 against the dollar, rose 1.5 per cent to £0.8754 against the euro and climbed 3.2 per cent to Y138.87 against the yen. Looking ahead, February CBI distributive trades forecast at -52 vs. -47 previously.

USD was sold broadly in Asia and early Europe as the Citigroup/ US government investment story took hold and stocks reversed losses. The rally proved short-lived with US equities reversing early gains and plummeting to new year lows.

Meanwhile, the dollar gave back some iof ts recent gains in the wake of the Citigroup reports, easing 0.3 per cent to $1.2830 against the euro, USD fell 0.7 per cent to $0.6492 against the Australian dollar. The dollar rose 1.4 per cent to Y94.79 against the Yen, however, its highest level so far this year, as the Japanese currency fared even worse.

The Euro weakened somewhat against the pound with sterling euro hitting highs of 1.144 and lows of 1.1208.  Against ther dollar it managed to rally up to resistance levels at 1.3 before Fitch warned on Austrias outlook and ECB President Trichet spoke of the deterioration of the Eurozone economy.

Weak US stocks added to the pressure and the pair finished at supports around 1.27 .  Inflation data for the region is due out on Friday and is expected to show inflation fell to 1.1% in January which will keep deflation as a possibility. Trichet is forecasted to cut rates by 50bps next week which may limit the upside potential for the single currency.

 However, as the ECB is one of the few major central banks which is not on the verge of quantitative easing which could add support for the Euro as other countries start printing more money. 1.3000 is a key level to watch could prove formidable.