Sterling pushed to a high of 1.7830 against the US dollar, but was unable to...

... hold
the position above the 1.78 level and weakened back to 1.7750 in early Europe on
Thursday. Sterling weakened to 0.6940 against the Euro and a weak dollar recovery
also undermined the UK currency to some extent.

The Bank of England interest rate decision on Thursday will be the prime short-term
focus. Overall, there is a 80% chance that the bank will decide on a 0.25% cut in
rates to 4.5%. If so, the statement accompanying the decision will be important. If
it focuses on external considerations this will lessen the potential for further
near-term rate cuts. If, however, the bank concentrates on domestic concerns, the
chances of further rate cuts would be higher. The more likely outcome at present is
that the bank will resist a series of rate cuts and will want to assess consumer
spending over the next 2-3 months. This should limit selling pressure on the
currency over the next 2-3 weeks.

Sterling is likely to rally in an initial reaction if rates are left on hold, but
selling pressure would be likely to return quickly as markets will expect a
September rate cut. Sterling should be able to avoid more than slight selling
pressure on a cut unless the bank is very cautious over near-term economic
prospects.

www.investica.co.uk