Sterling weakened to a low of 1.80 against the US dollar during European trading on
Monday...

... and the UK currency was struggling to regain any ground in early Europe on
Tuesday with Sterling unable to sustain a move above 1.81. Sterling also weakened
back beyond 0.67 against the Euro from highs around 0.6680 during Monday. Sterling
faces an important test of medium-term support around 1.80 against the dollar.

The UK housing data was weaker than expected with a decline in the RICS index to -49
in the three months to May from -41 the previous month. Given that it is a
three-month figure, the May data must have been very weak. The UK inflation data was
slightly stronger than expected with a 0.4% price increase for May which kept the
annual rate unchanged at 1.9% compared with market expectations of a decline to
1.8%.

There will be further speculation over a cut in UK interest rates following the
disappointing housing data. Bank of England Governor King, however, stated that
there could be a rebound in consumer spending over the second half of the year. King
will be anxious to keep the banks' options open and will not want rate-cut
speculation to intensify, especially with some doubts over the inflation trends. If
the forthcoming data is also weak, however, the bank will find it very difficult to
dampen market expectations over a near-term cut and this would damage Sterling.


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