Sterling retreated on Monday with loses to near 1.7525 against the dollar and 0.6870
against the Euro. In part, this was a reaction to Friday's gains,… … but there were
also some wider economic fears. Sterling weakened to just below 1.75 in early Europe
on Tuesday with a further retreat to 1.7460 as the dollar gained ground, but the UK
currency regained some slight ground against the Euro. Sterling will not be able to
regain much ground against the dollar until US sentiment deteriorates.

Consumer prices rose 0.2% in September with the annual rate increasing to 2.5% from
2.4%, although this was less than feared by the markets and will ease inflation
concerns slightly.

News that Bank of England MPC member Large will leave in January undermined Sterling
as Large is a strong proponent of price stability and has taken a tough stance on
interest rates over the past few months. His departure will make it slightly more
likely that a rate cut will be sanctioned over the next few months. There will still
be strong voice for unchanged rates in the short term with deputy governor Lomax
stating that it was vital to avoid an increase in inflation expectations. There is
still a high risk that there will be calls for a rate cut and there is certainly the
risk of a split decision at the November meeting.

The RICS house-price index improved slightly to -21 in September from -25 in August
and the RICS is also looking for prices to rise over the next three months. Evidence
of stabilisation or a slight improvement will offer some Sterling support,
especially as it would ease pressure for a further near-term cut in interest rates.

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