Tuesday October 12, 2004 - 10:20:10 GMT
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INVESTICA Ltd - www.investica.co.uk
Sterling at risk
The speculation that interest rates have peaked will intensify after the weaker than expected inflation figures and this will tend to increase Sterling vulnerability. There will also be longer-term unease over the widening trade deficit. Overall, there is likely to be a Sterling move towards 0.6920 against the Euro. Sterling needs to hold support close to 1.7820 to avoid steeper losses against the US currency.
Sterling pushed back to 0.6880 against the Euro, but was unable to strengthen through this level. Sterling was unable to push above the 1.80 level against the US dollar and weakened back to 1.7920 in early Europe on Tuesday. Sterling also dipped significantly after the UK inflation data.
Consumer inflation was significantly weaker than expected with the monthly increase held to 0.1% and this pushed the annual inflation rate down to 1.1% from 1.3% and compared with expectations of an increase to 1.4%. The weaker than expected figure will reinforce market speculation that a further UK interest rate increase will not be needed.
Markets will now look for the minutes from last month's Bank of England report to assess the bank's attitude towards rates. If they downplay the prospect of another rate increase, Sterling will be subjected to further downward pressure.
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