Monday July 11, 2005 - 09:44:04 GMT
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INVESTICA Ltd - www.investica.co.uk
Inflation focus for Bank of England
Sterling remained volatile on Friday and weakened to a low near 1.73 against the US currency before securing a temporary rally back to 1.7440, but Sterling was unable to hold above 1.74. The UK currency made a further attempt at pushing above 1.74 in early Europe on Monday, supported by a wider dollar correction, but Sterling remained weak against the Euro.
Sterling will remain vulnerable to further terrorism alerts in the UK. In particular, there will be fears over further attacks unless the security forces express confidence that the people responsible for last week's attacks have been captured. Even if there is an easing of security concerns, Sterling will remain vulnerable to the economic fears and expectations of aggressive interest rate cuts.
The headline producer price inflation data was under control with a 0.2% monthly decline, but there was sharp increase in input prices with an annual increase of 12.1% the biggest increase for at least 20 years. Markets will look closely at the consumer inflation data due on Tuesday and an increase to above 2.0% would cause complications for the bank. The market reaction to any increase in inflation to above 2.0% would also be important. The trade deficit narrowed slightly to GBP4.96bn in May from an upwardly-revised GBP5.13bn which will maintain the longer-term concerns over the UK trade position.
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