Sterling was unable to hold gains towards 1.7780 against the dollar on Tuesday and weakened back to 1.7655 ahead of the Fed decision before rallying...

... to 1.7690. Sterling had a slightly softer tone against the Euro, weakening back to 0.6750. Sterling lost further ground against the Euro on Wednesday and, after a temporary push to 1.78, Sterling retreated to 1.7720 against the dollar after the weak UK data.


Sterling will gain some support from
speculation that the US Fed tightening cycle is close to completion, especially
as there is a greater chance that US interest rates will not move above UK rates
during the first quarter of 2006, but the impact will be limited by the fragile
nature of the UK economy.

There was an increase in
unemployment of over 10,000 in November, the 10th successive increase and the
increase in earnings was significantly lower than expected at 3.6% in October
from 4.1% the previous month. Although distorted by the timing of bonus
payments, the low figure will increase speculation over a further interest rate
cut early in 2006 and will tend to weaken Sterling.


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