Thursday August 4, 2005 - 09:59:17 GMT
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INVESTICA Ltd - www.investica.co.uk
Sterling discounts rate cut
Sterling pushed to a high of 1.7830 against the US dollar, but was unable to hold the position above the 1.78 level and weakened back to 1.7750 in early Europe on Thursday. Sterling weakened to 0.6940 against the Euro and a weak dollar recovery also undermined the UK currency to some extent.
The Bank of England interest rate decision on Thursday will be the prime short-term focus. Overall, there is a 80% chance that the bank will decide on a 0.25% cut in rates to 4.5%. If so, the statement accompanying the decision will be important. If it focuses on external considerations this will lessen the potential for further near-term rate cuts. If, however, the bank concentrates on domestic concerns, the chances of further rate cuts would be higher. The more likely outcome at present is that the bank will resist a series of rate cuts and will want to assess consumer spending over the next 2-3 months. This should limit selling pressure on the currency over the next 2-3 weeks.
Sterling is likely to rally in an initial reaction if rates are left on hold, but selling pressure would be likely to return quickly as markets will expect a September rate cut. Sterling should be able to avoid more than slight selling pressure on a cut unless the bank is very cautious over near-term economic prospects.
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