Tuesday June 14, 2005 - 09:57:43 GMT
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INVESTICA Ltd - www.investica.co.uk
Sterling faces important test
Sterling weakened to a low of 1.80 against the US dollar during European trading on Monday and the UK currency was struggling to regain any ground in early Europe on Tuesday with Sterling unable to sustain a move above 1.81. Sterling also weakened back beyond 0.67 against the Euro from highs around 0.6680 during Monday. Sterling faces an important test of medium-term support around 1.80 against the dollar.
The UK housing data was weaker than expected with a decline in the RICS index to -49 in the three months to May from -41 the previous month. Given that it is a three-month figure, the May data must have been very weak. The UK inflation data was slightly stronger than expected with a 0.4% price increase for May which kept the annual rate unchanged at 1.9% compared with market expectations of a decline to 1.8%.
There will be further speculation over a cut in UK interest rates following the disappointing housing data. Bank of England Governor King, however, stated that there could be a rebound in consumer spending over the second half of the year. King will be anxious to keep the banks' options open and will not want rate-cut speculation to intensify, especially with some doubts over the inflation trends. If the forthcoming data is also weak, however, the bank will find it very difficult to dampen market expectations over a near-term cut and this would damage Sterling.
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