16 July 2004, 12:16  Sterling eyes 1-week low, rate rise doubts emerge

Sterling slipped close to one-week lows against the dollar and the euro on Friday as recent UK economic data cast doubt on the pace of future interest rate hikes. Sterling pulled back from four-month highs against the dollar set at the beginning of the week, bowing also to a broad recovery in the dollar. But the pound largely shrugged off domestic political news, after Britain's Labour government lost one key parliamentary by-election and narrowly avoided defeat in another on Friday in the wake of a damaging report on Iraq. "The data this week has trimmed back interest rate expectations a little bit," said Mark Henry, currency strategist at GNI in London.
"The political situation is not having a huge impact." Sterling traded at $1.8516 at 0750 GMT, up from one-week lows of $1.8474 set on Thursday and retested on Friday, but 1-1/2 cents below four-month highs set on Monday. The pound was trading at 66.81 pence per euro compared with one-week lows of 66.85 pence set on Thursday. Sterling hit one-week lows on its trade-weighted index <=GBP> on Thursday, an indicator closely watched by the Bank of England. Prospects of further monetary tightening in Britain, following four hikes already put in place by the Bank of England since November, have been supporting the pound in recent months. But any hints that these expectations are overaggressive are inclined to hit to sterling, analysts say. Producer price and consumer price inflation data this week depressed expectations for aggressive interest rate rises. But analysts still largely expect UK rates to go up in August from the current 4.5 percent. A report this week by former civil servant Lord Butler absolved Prime Minister Tony Blair of distorting intelligence on Iraq but said Baghdad had no significant stores of chemical or biological weapons ready for use -- despite Blair's pre-war claim that it did.
In a light UK calendar on Friday, sterling investors will be watching the release of U.S. consumer prices for June at 1230 GMT, forecast to show a rise of 0.2 percent on the month, compared with a 0.6 percent rise in May.///

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