Sterling was unable to hold the gains on Monday and weakened back to below 1.75 in New York Sterling weakened
further against the dollar in… … early Europe on Tuesday with a drop to just below
1.7400 and US interest rate expectations are likely to dominate in the short
term.

The British Retail Consortium (BRC)
reported a like-for-like increase in retail sales of 0.6% in the year to
February. The overall sales performance is uninspiring, but is unlikely to have
a significant near-term impact on the Bank of England with the central bank
likely to keep interest rates on hold this week. Global interest rate trends
will make it difficult for the UK currency to secure strong near-term buying
interest with the potential for further ECB interest rate increases while
markets will also be expecting US interest rates to rise to at least 5.0%
compared with 4.50% in the UK.

Sterling is still in a position to
gain support from investment inflows into UK markets, especially if global risk
tolerance levels remain firm. Following the agreed bid for UK BOC from German
group Linde and Vodafone's plan to sell its Japanese operations in a deal which
could be worth close to GBP10bn, there will be speculation over further deals.
These deals combined would probably involve significant Sterling inflows and
offer currency support, although it will be difficult to quantify the amounts
involved.

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