Wednesday December 1, 2004 - 11:31:32 GMT
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INVESTICA Ltd - www.investica.co.uk
Euro-zone fears boost Sterling
The stronger than expected UK data will reduce expectations of an interest rate cut early next year. There is also the potential for dollar selling to be more concentrated against Sterling given the weak Euro-zone data and the lack of public Bank of England concern over Sterling strength. The rally against the Euro and dollar could also encourage further speculative buying, but Sterling looks over-extended and the dollar is starting to offer medium-term value against Sterling above 1.92.
Sterling strengthened strongly on Tuesday after robust economic data encouraged a flow of funds into Sterling. Gains extended to 1.92 against the US currency and 0.6925 against the Euro on Wednesday after firm UK data.
There has been some readjustment of interest rate expectations following Tuesday's data, although there has also been a speculative element to the Sterling buying. The comments from the Bank of England were not markedly different from expectations, but expectations of an interest rate cut early in 2005 have dipped sharply. The trend for stronger than expected UK data continued on Wednesday with the CIPS index for the manufacturing sector increasing to a four-month high of 55.0 in November from 53.5 in October.
The Bank of England also appeared to be comfortable with Sterling strength and this helped encourage further Sterling buying. The markets may tend to see dollar selling against Sterling as more attractive, especially with poor Euro-zone data today.
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