Tuesday August 16, 2005 - 10:12:03 GMT
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INVESTICA Ltd - www.investica.co.uk
Inflation uncertainties for Sterling
Sterling weakened to below the 1.81 level against the dollar after the US capital flows data, but Sterling pushed back to just above this level in New York on Monday. Sterling remained firm against the Euro and the UK currency strengthened after the inflation report, but the longer-term implications may be less favourable.
The RICS house-price index strengthened slightly to -36 in July from -42 in June with some evidence that underlying market conditions were slightly stronger. The longer-term trends, however, are likely to be negative for the UK currency as there will need to be a further adjustment. Shorter-term confidence will, however, remain slightly stronger which will limit immediate selling pressure on Sterling.
The consumer inflation report was stronger than expected with a 0.1% monthly increase pushing the annual rate up to 2.3% from 2.0%. This is above the Bank of England's 2.0% target and, although the central bank was expecting the increase in the inflation report released last week, the increase will make it even more difficult to sanction a further near-term cut in interest rates. This will tend to offer near-term support to Sterling, especially with the UK currency gaining support against the Euro on yield considerations. It is, however, the case that Sterling will be vulnerable if there is rising inflation at the same time as a further deterioration in growth.
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