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The Independent Online
STERLING IS poised to strengthen against the euro this week, amid expectations that United Kingdom reports will show inflation remains dormant during the economy's recovery.

"The pound is probably going to be fairly firm," said Jeremy Yeats-Edwards, manager at Baring International Investments. "Interest rates are attractive and the economy is in good shape."

The pound has gained 0.3 per cent against the euro in the past week, putting the euro at pounds 0.6391 from Thursday's closing value of pounds 0.6414. Against the dollar, sterling slipped to a two-month low of $1.6108, and traded at $1.6137 late on Friday from $1.6236 on Thursday.

On Tuesday, the British Government will release estimates of its chief inflation yardstick, the retail price index, less interest payments on home loans.

The index was probably at 2.1 per cent in October, unchanged from the previous month and below the Government's target, according to economists surveyed by Bloomberg News.

On Wednesday another set of numbers is likely to show that the number of Britons out of work and claiming unemployment benefits fell by 10,000 in October, leaving the unemployment rate at a 19-year low, economists said.

That combination of growth with scant price pressures tends to support sterling by drawing investors to the nation's equities and bonds. The UK's benchmark stock index was up 2.1 per cent last week, while the yield on the 10-year UK gilt market fell to its lowest level in five months.

At the same time, short-term lending denominated in the pound offers investors a greater return that that in the euro.

"Sterling should stay strong," said Roger Allen, deputy head of foreign exchange sales at Credit Agricole Indosuez. The UK has interest rates that are higher than those in other European countries and has "a very strong economy".

An investor parking funds in three-month pound deposits earns 252 basis points more than on those in the euro.

Bank of England officials also will publish minutes from this month's Monetary Policy Committee meeting, when it voted to raise interest rates a quarter point.

Also in the pound's favour, reports last week indicated that both the Bank of England and the Government see growth accelerating in the coming months while price pressures will stay subdued. Still, the Bank forecasts faster inflation in 2001 and has left itself scope for a further rate rise in the coming months, economists said.

Higher interest rates may draw investors to a currency since they mean that the return on money-market deposits denominated in that currency also increases.

The pound is poised to lose ground against the dollar on expectations that United States inflation will stay subdued, helping US stocks and bonds hold their lustre. That view was reinforced on Friday after a report showed a stronger than expected gain in US productivity in the third quarter. "That enhances the opinion that the Fed won't do anything this week," said Rob Hayward, an economic adviser at Bank of America.

"Even if they do, it will be the last one for a long time and that's providing a positive backdrop for US assets, which has to spill over into the dollar."