Friday January 21, 2005 - 11:22:55 GMT
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INVESTICA Ltd - www.investica.co.uk
Fundamental Sterling doubts
Sterling held firm against the Euro and, after a decline to 1.8640 against the dollar, Sterling recovered back to 1.8715 in New York. Sterling was little changed in early Europe on Friday before dipping sharply after the data, weakening to 1.8640 against the dollar and 0.6975 against the Euro.
The UK December retail sales report was much weaker than expected with a 1.0% monthly decline which cut the annual growth rate to 3.2, the lowest since November 2003. Bank of England Governor King warned on Thursday night not to read too much into one month's data and the Bank of England will want to take a measured stance, especially as wider spending is likely to have been stronger. There are particular difficulties with the December report as there is a huge seasonal adjustment which can distort the figure.
The government borrowing figures were also worse than expected with a GBP14.7bn December shortfall, the worst December monthly figure on record. The widening borrowing requirement is a greater longer-term risk for Sterling. If the economy does start to slow, there will be much greater upward pressure on the budget deficit. Sterling would then be vulnerable on interest rate grounds as well as fundamental concerns and there could be a swift exodus of overseas investment capital.
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