Tuesday May 10, 2005 - 09:41:09 GMT
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INVESTICA Ltd - www.investica.co.uk
Vital 24 hours for Sterling
Sterling was undermined on Monday by the weak manufacturing data and the Bank of England rate decision offered no support to the UK currency on Monday. Sterling weakened to lows close to 1.88 against the dollar before a limited recovery and Sterling also weakened to 0.6820 against the Euro. Sterling came under fresh selling pressure in early Europe on Tuesday after a weak retail sales report.
The central bank left UK interest rates at 4.75% on Monday. The bank will still be concerned over inflationary pressure, but there will also be growing doubts over the UK economy with fears over a sharp slowdown in growth following a series of disappointing data. Confidence was further damaged by a report showing a sharp drop in retail sales for April with the BRC reporting a decline in like-for-like sales of 4.7% for April. Although the figure may have been distorted by the timing of Easter, Sterling sentiment is still liable to weaken further.
The markets will also be looking very closely at the Wednesday Bank of England inflation report to assess the potential for a further rate increase. Sterling will be vulnerable to further selling pressure if rates appear to have peaked. Even if the bank signals that a rate increase is likely on inflation considerations, the benefit to Sterling will be very limited if the economy is weakening at the same time. Narrowing interest rate differentials between Sterling and the dollar will also tend to undermine the UK currency. Markets will be looking at the UK trade figures which are also due for release on Wednesday as a deterioration would further damage Sterling sentiment.
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