Wednesday August 8, 2007 - 10:06:33 GMT
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INVESTICA Ltd - www.investica.co.uk
BOE signals one more rate increase
With 6.0% interest rates already priced in, Sterling will not gain strong support from the Bank of England inflation report.
Sterling remained on the defensive during Tuesday with lows around 2.0190 against the dollar and 0.6715 against the Euro before a measured rebound in US trading. The UK currency was unable to hold the gains and dipped back below the 2.02 level in early Europe on Wednesday, the lowest Sterling level for a month. From lows near 2.0150, the UK currency rallied back to 2.0230, helped by a weaker dollar.
There has been a gradual erosion of UK interest rate expectations over the past week with reduced confidence that rates will be increased to above 6.0% and this is undermining Sterling support given the amount of further tightening previously priced in. The potential for an adjustment in Sterling positions is being compounded by the continuing pressure for an unwinding of carry trades as underlying risk aversion remains strong.
The Bank of England inflation report indicated further concerns over inflation. The report signalled that the bank is expecting interest rates to increase rates to 6.0%, but not beyond this level.
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