Sterling remained under pressure on
Wednesday, dropping sharply against the Euro to a lows around 0.69 and failing
to secure a significant recovery in New… … York. The UK currency was also unable to
sustain any headway against the US dollar and weakened sharply to lows below
1.7150 as low liquidity helped trigger erratic moves and stop-loss selling.
There were also reports of merger-related flows out of Sterling and rumours of
central bank Sterling selling. The UK currency secured a fragile recovery in
early Europe on Thursday.

Interest rate considerations will
remain very important in the short term with further market expectations of a
cut in UK rates early in 2006. The data over the past week suggests firm
consumer spending and a small rise in house prices. This combination should
deter the Bank of England from a further near-term cut in interest rates. On
Thursday, there was a reported drop in
consumer confidence for December, but there was firm growth in mortgage lending
for November

Although Sterling sentiment will
remain weak, there will be the potential for a sharp correction given that
favourable news has been ignored over the past 24 hours. Erratic moves will
remain a high risk in the short term.

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