Sunday 11 April 1999
"Sterling in the very near term will remain underpinned," said Keith Edmonds, chief currency analyst at IBJ International.
On Friday, the pound was little changed against the euro, leaving the euro at 0.6712 per pound. The pound closed the week at $1.6097, but it's up about 1 per cent since falling to a 19-month low on Tuesday.
The pound is likely to get an added lift against the euro as the European Central Bank lowered its bellwether rate by a more-than-expected 50 basis points on Thursday, widening the gap between short-term lending rates in the UK and euroland. So, even with the UK rate cut, sterling deposits are still more attractive than euro ones.
The euro could decline as far as 0.64 a pound in the coming months, said Merrill Lynch European strategist, Tom Hobson.
Interest rate cuts can be good for the economy because they make it cheaper for individuals and companies to take out loans. Some economists expect the central bank to reduce that rate further in coming months.
"What we're seeing is a central bank that is coming to grips with the idea that growth doesn't automatically mean inflation," said James Shugg, an economist at Westpac Banking Corp. "If they leave rates where they are, inflation will well undershoot the (Government's) target." The benchmark rate could fall to below 5.0 per cent this year, Shugg said.
Interest-rate futures contracts that settle in June show expectations that three-month rates will fall to 5.06 per cent by then. That rate is down 3 basis points from yesterday. The 25 basis-point gap between that rate and current lending rates of 5.31 per cent indicates some traders and investors expect another rate cut by the time the contract expires. "These cuts will boost the economy," said Paul Podolsky, a currency strategist at BankBoston. "We are bullish on sterling."
Reports last week suggested the Bank of England's five rate cuts between October and February may have already begun to put the economy on a stronger footing.
Some strategists are also bearish on the euro versus major currencies on the speculation that it may take time before the ECB rate cuts begin to turn the European economy around and give the single currency a boost.
The euro also is being stung by concern that war in Kosovo, at the euro- region's borders, may sour investors on euro-denominated assets. "I don't think the markets have fully appreciated how dire this situation can become," said Giorgio Radaelli, head of European market research at First Chicago Bank. "The euro will continue to decline partly because of war and partly because of weakness in the European economy."
The pound may struggle against the dollar on signs that the US economy is outperforming the UK, some investors said. "Sterling might weaken a bit against the dollar because of the strength of the US economy versus the UK," said John Praveen, global market strategist at Credit Suisse Asset Management.
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