Sterling enjoyed a short-term boost this morning as news that Telefonica was lining up a bid for mobile phone operator O2 helped bolster the pound.

The euro stood at 1.4743 against the pound, while the dollar was at 1.7784 to sterling.

Bank of America currency strategist Kamal Sharma told Reuters: "News of the Telefonica deal is giving a bit of a psychological boost to sterling today."

Meanwhile, news that business confidence is on the up in the UK is also set to shape the markets, with a new report released by accountant BDO Stoy Hayward offering an indication of a "resilient" economy.

BDO Stoy Hayward's Peter Hemington said the UK economy is "looking healthy for the beginning of 2006".

"Business confidence is up, helped by the fact that interest rates fell by a quarter of a point in August," he commented.

Firms including BAA, Matalan and 888 Holdings will release results at the start of the week.

Big interim results from Alliance Pharma, Carphone Warehouse, ICI, the London Stock Exchange and Unilever are also expected to be closely scrutinised.

On Friday British Airways and BskyB will also be publishing their interim results.