Sterling weakened to low beyond the
0.68 level against the Euro and failed to hold above 1.77 against the US
currency with a drop to… … lows just below 1.76 before a slight recovery. The shift
in positioning seen over the past week will make it more difficult for Sterling
to gain ground. Sterling weakened to 1.7575 in Asian trading on Tuesday before a
recovery to 1.7660 after the UK data.

The comments from Bank of England
Chief economist Bean weakened Sterling on Monday after he stated in a weekend
interview that easing inflation has removed one area of uncertainty. This
implied that the bank is now less concerned over inflation and the comments will
reinforce speculation that the MPC could now be in a stronger position to
consider a rate cut early in 2006. Near-term evidence on growth trends will,
therefore, be even more important with markets also looking at Wednesday’s MPC
minutes to assess the extent of MPC support, if any, for an early interest rate
cut.

The RICS house-price index recorded
an increase in prices in November for the first time in over 12 months with the
index rising to +4 from -8 in October which, coupled with a boost in November
mortgage lending will reinforce expectations of a limited recovery in the
housing sector. The housing data should convince the bank to keep rates
unchanged.

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