THE refusal by Iceland’s president to sign a bill to refund the UK some £2.3bn in savings lost in the Icesave collapse has the potential to heap further pressure on sterling.

We’ve seen cable struggling to hold above the 1.6000 level in recent days and assuming there are no hints from the MPC later this week regarding the future direction for UK interest rates, the next big level to watch for will be those mid-October lows of around 1.5800.

IG Index is currently offering a price of 1.6020-1.6023

Over the pond, the US dollar seems to be the focus again as investors return to riskier assets. The big question for 2010 is whether the US dollar will be able to maintain the small recovery that it started at the end of 2009. This would mean further strength for the dollar/yen pair. Capital Spreads quotes a price of 91.93-91.95 for the dollar/yen.

The euro/dollar has regained some ground since its recent low of 1.4215, a significant level as it is just above its 200-day moving average. However, sovereign debt fears will continue to weigh on it and the long term target remains 1.3800 for the first quarter of 2010, says CMC Markets.

But there is potential for the euro to return to the 1.4580 level in the short-term. Yesterday it tried to break above this level, but could not manage it and instead returned to its previous range between 1.3750 and 1.4485. The euro is unlikely to break above 1.4530 but if it does, expect it to rise to 1.4630.

Traders will take profits at the 1.4500 level and look to buy at the level of the recent lows, around the 1.4215 mark. If the euro breaks below the 200-day moving average and then stays there, that would suggest that the euro could fall to 1.3800. CMC Markets is currently quoting euro/US dollar at 1.4414-1.4416 with a two basis point spread. The US payrolls figure always causes the forex markets to flutter, and the latest numbers are due on Friday. The improvement in the US labour market data for November caused a rally in the greenback and the same could happen when we know the December figures.

The US economy seems to be firmly in recovery mode and there is reason to expect that the labour market will continue to improve. Long Australian dollar/US?dollar was a popular carry trade for 2009 after the Australian central bank raised interest rates. However, the pair remains reluctant to push above the 0.9160 level, and if payrolls boost the perception of a US economic recovery then it could be worth shorting this pair. CMC quotes a price of 0.9138-0.9140 for the Australian dollar/US?dollar.

Kathleen Brooks