Thursday April 7, 2005 - 10:06:29 GMT
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INVESTICA Ltd - www.investica.co.uk
What to expect from the Bank of England
Sterling did push to near 1.8850 against the dollar in early Europe on Thursday as the US currency suffered a wider correction before sliding back to 1.88 on poor UK data. Sterling also weakened beyond 0.6850 against the Euro.
The UK industrial production figures were weaker than expected with a 0.4% monthly decline for February. There was a 0.5% manufacturing decline, the weakest performance since last August, and there was also a downward revision to January data. The data will reinforce concerns over the UK manufacturing sector and will increase pressure for the Bank of England to keep interest rates on hold to avoid further manufacturing-sector stresses. The data will also increase fears over the UK trade outlook.
The Bank of England will have some concerns over inflation and will have to consider a rate increase. The situation is not urgent, however, and the bank is likely to keep rates on hold for now, especially given the political situation with an on-going election campaign. The chances of a rate increase appear to be around 20% at most. If the bank does decide to increase rates, there will be sharp Sterling gains initially, potentially towards 1.89 against the dollar, although these could reverse quickly on expectations that UK rates have peaked.
Any opinion polls suggesting a very close UK election result would be likely to weaken Sterling slightly on fears that no party will secure a majority.
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