Investors got a heavy dose of economic data last week, some of it hinting that the economy may be strengthening. Fewer people than forecast were out of work, wages rose more than predicted, and retail sales rebounded. Inflation also came in above the Government's target.
Yet a report on Friday underscored the fragility of the economy. First- quarter gross domestic product edged up only 0.1 per cent, not enough to convince investors that benchmark rates will hold at the present level. Minutes from the Bank of England's April meeting suggested they may be right.
"We wouldn't be surprised to see another quarter- or half-point cut," said Stuart Kinnersley, chief investment officer at Nikko Global Asset Management.
On Friday, the pound rose to $1.6178, up a third of a cent from a week ago. Sterling was little changed at pounds 0.6579 per euro, holding to a near 7 per cent gain against the EU's currency so far this year.
Economists are split over whether the rate-setting Monetary Policy Committee will lower rates when it next meets on 5 and 6 May. Eight of 15 analysts surveyed expect rates will hold, while seven said the bank will trim borrowing costs another 25 basis points. "The data last week argues for the Bank of England being on hold [in May]," said Michael Hume, an economist at Lehman Brothers.
As the signs of growth accumulate, investors are scaling back their expectations for coming rate cuts, according to the interest-rate futures market. They now anticipate three-month rates at 5.19 per cent by June, up 4 basis points from a week ago. Rates are now at 5.32 per cent. "The window of opportunity for more rate cuts is getting smaller," said Neil Parker, an economist at Royal Bank of Scotland.
Minutes from the Bank of England's April meeting, released on Wednesday, suggested interest rates will fall later this year even if policy makers refrain from a May easing. Analysts are citing the strength of sterling as one reason. Sterling has risen over 5 per cent against the currencies of the UK's major trading partners this year.
This week's trade balance report will reveal how much a strong pound is hurting exporters. Figures on the March trade balance with countries outside the EU and February's overall balance are released on Tuesday.
The dollar was little changed against the euro after Nato officials rejected Serbia's proposal for a resolution to the fighting in Kosovo on Friday. The prospect of an end to the air strikes initially boosted the euro, which has fallen more than 2 per cent since the bombing started.
"Unless something more substantial comes from Milosevic, we'll be in a range of $1.0690 to $1.0590 for each euro," said Per Norr, a trader at Den norske Bank. For the week, the euro fell 0.40 per cent against the dollar and the yen fell 1.15 per cent as Japanese officials warned a strong yen could squelch any economic recovery.
Further weakness in the euro could call European monetary leaders to action. The French Finance Minister, Dominique Strauss-Kahn, said further euro weakness would be undesirable as it could make euro-assets unattractive to investors.