BOE Remarks Weaken Sterling

Underlying confidence in the UK debt position and currency is liable to remain weak. The near-term housing-sector improvement will continue to provide some degree of support as will the slightly stronger than expected inflation. Nevertheless, rallies are still liable to attract significant selling pressure given the underlying structural debt vulnerabilities and Bank of England concerns. Selling rallies looks the best option.

Sterling was unable to sustain gains back above the 1.66 level against the US currency on Monday and also weakened to 0.8820 against the Euro before finding some support. Sterling edged higher on Tuesday with a renewed advance above the 1.66 level as RICS reported the first increase in house prices for two years.

The headline consumer inflation rate edged lower to 1.6% in August from 1.8%, but this was again slightly higher than expected which should provide some immediate Sterling support as there will be less pressure for an aggressive Bank of England response.

Bank of England Governor King stated that a cut in deposit rates on commercial bank reserves is being considered and this pushed the UK currency sharply weaker to lows below 1.65 against the dollar.

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