Monday August 8, 2005 - 14:51:22 GMT
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INVESTICA Ltd - www.investica.co.uk
Near-term Sterling recovery
Unease over the UK economy will persist with a particular focus on consumer spending. There was a sharp slowdown during the second quarter and credit demand is likely to remain lower in the short term, especially with the housing sector stable at best. Lower interest rates will underpin confidence marginally, but spending levels are still likely to be subdued. The consumer is already over-stretched with very high debt levels and further rises in unemployment could cause major damage to spending confidence.
Government spending will not be able to provide additional stimulus and the export trends will be watched closely in the short term. The Bank of England will be monitoring inflation levels very closely, especially as input prices have risen strongly over the past few weeks. Rising inflationary pressure would make it much more difficult for the bank to cut interest rates again. Overall, the central bank is likely to resist an aggressive series of interest rate cuts over the next few months and could decide to keep rates on hold throughout the remainder of 2005. Euro-zone confidence has stabilised with some evidence of strengthening growth and this will provide background Euro support. Overall, Sterling should be able to secure some near-term recovery against the Euro even though the economic fundamentals suggest further medium-term depreciation is likely.
A sharp housing downturn would expose Sterling to heavy selling pressure.
Any renewed loss of US dollar confidence would tend to weaken Sterling against the Euro.
A series of UK interest rate cuts would damage Sterling.
Stronger Euro-zone growth would tend to undermine Sterling.
An ECB rate increase would weaken the UK currency.
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