Tuesday August 3, 2004 - 10:00:47 GMT
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INVESTICA Ltd - www.investica.co.uk
UK rate hike priced in
The data has continued to back the case for a UK rate hike and this will help underpin Sterling. A 0.5% rate increase this week or signs of a further rate increase in September will, however, be needed to trigger further buying interest as a 0.25% tightening has been priced in. Sterling is liable to be capped around 1.8325 against the dollar in the short term, but with support close to 1.8150. Long Sterling positions still offer little value stronger than 0.66 against the Euro.
Sterling pushed to a high of 1.8325 on Monday, but a dollar rally pushed the UK currency back to 1.8225 in early Europe on Tuesday with a subsequent move to 1.8190. Euro vulnerability on the crosses allowed Sterling to move to 0.6590 against the Euro, but Sterling was struggling to hold stronger than 0.66.
There is a 80-90% probability that the Bank of England will raise interest rates on Thursday. There has also been speculation of a 0.5% increase to control the housing market and this boosted Sterling on Monday. Sterling will, therefore, be vulnerable to some profit taking if speculation over a 0.5% increase fades and the most likely outcome is that the bank will persist with 0.25% rate increases. Sterling will also be vulnerable to heavy selling pressure if rates are left unchanged.
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