Guarded optimism from the Bank of England balances concern about UK government borrowing. The European Central seems to be looking ahead to taking interest rates higher.

Sterling ratcheted higher, having dipped only briefly below last Monday's €1.0950 starting level. It peaked above €1.11 on Friday and opened in London this morning a cent higher on the week at €1.1050.

Sterling began the week as it had ended the previous one; under the microscope. Investors were more relaxed regarding the default of Dubai World and the exposure of UK banks to the firm. However, they were still sensitive about government debt, which is expected to reach

Investment bank Morgan Stanley fanned the flames with a research paper. It said 'In an extreme situation a fiscal crisis could lead to... severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economy.' Nobody could accuse Morgan Stanley of pulling its punches.

On the positive side, there were some chinks of light from the Bank of England. Monetary Policy Committee member Adam Posen said in a speech that the UK economy has probably passed its lowest point. His colleague Spence Dale, who is also the Bank's chief economist, went down a similar track the following day. He told an audience in Essex that 'the economy appears to have turned' and 'we are likely to be moving into a period of renewed expansion.'

On the data front potentially the most important statistic from Euroland was Thursday's update to the figure for gross domestic product in the third quarter of the year. In the event it was unexciting; the original estimate of +0.4% growth remained unchanged so it gave investors no reason to push the euro one way or the other. The rest of the week's data were uninspiring. Euro zone unemployment was steady at 9.8% and retail sales were static in October.

Thursday's monetary policy meeting at the European Central Bank produced no surprises for interest rates: the key Refinancing Rate will remain at 1% for an eighth month. But there was more to it than that. ECB president Jean-Claude Trichet said at his usual press conference that the Bank will 'end long-term emergency loans and tighten the terms of its final 12-month tender'.

In other words, the ECB is taking the first step to ending its recession-busting largesse. Although M Trichet said the decision does not signal higher rates the market did not take his words at face value. Analysts believe it is the first step in a tightening process that will bring higher rates next year. It was a positive factor for the euro.

Another week of good-news-bad-news from both sides of the Channel left investors little wiser than they had been at the outset. We remain stuck with a pound/euro relationship that cannot make up its mind what to do and, therefore, does nothing.

We also therefore remain saddled with a neutral risk management strategy. Buyers of the euro should hedge half their requirement with a forward purchase. Those with a short time horizon who do not want to cover their whole exposure should protect themselves with a stop order.

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