Thursday December 23, 2004 - 11:09:00 GMT
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INVESTICA Ltd - www.investica.co.uk
2005 Sterling risks
The fundamental concerns over Sterling are likely to increase slightly with the deteriorating current account trend adding to the concerns over the budget deficit. There will also be speculation over a cut in interest rates next year, although this speculation is premature. The prime vulnerability for now is still the closing of a long Sterling positions and the economic fundamentals will be more of a currency risk during 2005. Sterling is liable to weaken to around 0.7040 against the Euro.
Sterling has remained on the defensive over the past 24 hours following the Bank of England minutes. Sterling fell to a low of 1.91 against the US currency before rallying back above 1.92 in early Europe on Thursday as the dollar weakened. Sterling weakened to 0.70 against the Euro.
The Bank of England minutes have provoked a significant reaction and there will be further speculation over a cut in rates during the first quarter of 2005. The evidence has, however, been far from conclusive and the reaction appears stronger than justified and indicates a closing of long Sterling positions. Sterling is also still vulnerable to a closing of long speculative positions.
The current account deficit widened to GBP8.77bn for the third quarter from GBP5.88bn in the second quarter, the highest figure for over 5 years. As a percentage of GDP of around 3%, the deficit is not yet in the danger zone and major concerns are unlikely until the deficit rises to around 5% of GDP. It is, however, a worrying underlying factor for Sterling and there will be fundamental concerns next year.
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