Tuesday October 18, 2005 - 10:03:47 GMT
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INVESTICA Ltd - www.investica.co.uk
Where next for Sterling
Sterling retreated on Monday with loses to near 1.7525 against the dollar and 0.6870 against the Euro. In part, this was a reaction to Friday's gains, but there were also some wider economic fears. Sterling weakened to just below 1.75 in early Europe on Tuesday with a further retreat to 1.7460 as the dollar gained ground, but the UK currency regained some slight ground against the Euro. Sterling will not be able to regain much ground against the dollar until US sentiment deteriorates.
Consumer prices rose 0.2% in September with the annual rate increasing to 2.5% from 2.4%, although this was less than feared by the markets and will ease inflation concerns slightly.
News that Bank of England MPC member Large will leave in January undermined Sterling as Large is a strong proponent of price stability and has taken a tough stance on interest rates over the past few months. His departure will make it slightly more likely that a rate cut will be sanctioned over the next few months. There will still be strong voice for unchanged rates in the short term with deputy governor Lomax stating that it was vital to avoid an increase in inflation expectations. There is still a high risk that there will be calls for a rate cut and there is certainly the risk of a split decision at the November meeting.
The RICS house-price index improved slightly to -21 in September from -25 in August and the RICS is also looking for prices to rise over the next three months. Evidence of stabilisation or a slight improvement will offer some Sterling support, especially as it would ease pressure for a further near-term cut in interest rates.
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