Sunday 24 May 1998
Evidence of stronger exports could concern policymakers at the Bank of England, who have said a too-swift fall in the currency could stoke inflation. If the bank needs to raise interest rates to keep that from happening, it would boost the money-market return on sterling deposits.
"It's definitely our view that we'll get another rate rise and that's going to keep sterling buoyant, although I don't expect to see a big rally," said Mark Wall, a European economist at Deutsche Bank. He expects the pound to rise to DM2.90 within three month.
The pound on Friday was worth DM2.8686 or $1.6316, close to its lowest level since 31 October.
Economists expect a Confederation of British Industry survey, due on Thursday, to show that UK manufacturers are growing more confident as the pound's 13-pfennig decline this month boosts exports. A trade survey on Friday, meanwhile, is forecast to show that the UK deficit narrowed in March.
Last month, the CBI said confidence about export prospects among UK companies fell to its lowest for 18 years in the quarter to April as the strength of the British pound eroded exports.
By 1 April, the pound's two-year advance against a trade-weighted currency basket had topped 30 per cent, making exports more expensive abroad.
Since then, though, the pound has pared its gains against the currency basket to 23 per cent.
Most of that retracement came after the summit on European economic and monetary union boosted investor confidence in the euro, puncturing the safe-haven buying that had buoyed sterling.
In this week's figures, economists expect the global trade deficit to have narrowed to pounds 1.55bn in March, compared with a pounds 2.201 bn deficit in February.
The trade deficit with countries outside the European Union, however, will probably widen in April to pounds 1.2bn from pounds 1.104 bn in March.
"Because the worldwide figure is predicted to ease, we probably won't see a negative impact on sterling since it will offset the larger non- EU deficit," Mr Wall said.
The pound already began gaining back some ground on Friday, rising as high as DM 2.8770 after a survey showing rising retail employment stoked concern about inflation and higher interest rates.
A British Retail Consortium survey showed that employment in retail industries rose 2.4 per cent - or by 56,000 jobs - in the six months to March. With unemployment already at a record low of 4.80 per cent, an increase in jobs could send wages higher.
"The BRC survey points to further tightening in the labour market, and the market is taking that as a positive for sterling," said Ed Garston, a currency analyst at Idea market research.
A gross domestic product report, also released on Friday, did little to clarify the interest-rate outlook. Growth was in line with forecasts of a 2.9 per cent annual increase in the first quarter, unchanged from the fourth quarter. Still, that's higher than the Government's first estimate of 2.8 per cent.
The base lending rate is at a five-year high of 7.25 per cent, after five quarter-point rate rises last year.
Copyright: IOS & Bloomberg
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