NEWS / Foreign Exchange

Daily FX Commentary

BOE hopes support Sterling

There will be further speculation that the Bank of England will sanction another increase in interest rates even though Monday's data was broadly neutral. Sterling should remain firm ahead of the Thursday BOE decision.  

After the dollar fell on Friday following the US decision to impose levies on Chinese imports, Sterling spiked to a high above 1.9700 against the US currency and challenged levels above 1.97 in early Europe on Monday.

The economic data this week will be important with a particular focus on price pressures. The CIPS index for the manufacturing sector weakened slightly to 54.4 in March from 55.4, although this was still a healthy figure in a longer-term context with prices index still relatively high. Speculation over a possible increase in interest rates is likely to provide near-term Sterling protection with the Bank of England due to announce its latest interest rate decision on Thursday. Speculation over a rate increase will be increased by the 'shadow MPC' vote of academics which voted for an increase in interest rates to 5.5%.

The housing sector will remain under close scrutiny in the short term with speculation over a strong second-quarter activity. The sector overall is still vulnerable to a sharp deterioration, especially with equity withdrawal levels increasing further in the fourth quarter of 2006 to GBP14.6bn.