Wednesday September 1, 2004 - 09:51:12 GMT
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INVESTICA Ltd - www.investica.co.uk
UK data hits Sterling
The weak data today will reinforce market convictions that the housing sector is slowing. In this environment, markets will expect one more UK rate increase at most. Although this may still be proved wrong, Sterling sentiment will remain negative in the short term with the risk of a move to 0.6810 against the Euro. Sterling offers little immediate value above 1.8020 against the US currency, although dollar vulnerability has reduced the immediate risk of a move below 1.7880.
Sterling found support at 1.7910 against the US dollar, primarily because of dollar vulnerability and it regained the 1.80 level briefly before weakening back to 1.7970 in early Europe on Wednesday. Sterling weakened significantly against the Euro to a low of 0.6775 and the UK data prompted further Sterling selling.
The August house price index from the Nationwide reported a 0.1% monthly increase, the lowest increase since October 2001 and the annual rate slowed to 18.9%. The manufacturing CIPS index also weakened to 53.1 in August from 56.0 the previous month, a sharper decline than expected, and this will reinforce near-term market concerns over the economy. These data releases will increase market speculation that the interest rate cycle is close to peaking. Indeed, there is the potential for markets to speculate that rates have already peaked. Although this is unlikely, with the bank likely to increase rates in November, Sterling will still be vulnerable in the short term.
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