Tuesday September 27, 2005 - 10:11:14 GMT
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INVESTICA Ltd - www.investica.co.uk
Rate expectations crucial
Sterling recovered from lows near 1.77 on Monday, but was unable to push above 1.78 and the UK currency weakened back to fresh monthly lows near 1.7650 in early Europe on Tuesday. The UK currency remained stuck close to 0.68 against the Euro.
Interest rate expectations will remain important in the short term with markets expecting further US interest rate increases over the remainder of 2005. With speculation that the Bank of England could cut interest rates again in November, there will also be speculation that short-term US rates will move above UK rates by early 2006. This speculation will retain the potential for selling pressure on Sterling in the short term.
The US economy, however, is also vulnerable to the same concerns as the UK, especially in view of strong housing-sector inflation and over-extended consumer sector. The similarity of trends will tend to limit the longer-term potential for substantial dollar gains against Sterling.
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