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Sterling Prepares for Difficult Week

Following last week’s poor showing for sterling, this week starts with a hopeful outlook on the state of the UK economy, but the hovering vultures of economic woe are still ever-present.

Sterling tumbled to a four-week low against the euro on Friday on optimism over a new bailout deal for Greece and on more evidence that an uneven UK economic recovery is likely to keep interest rates at record lows for the remainder of 2011.

The pound fell to €1.1220, and remained around this level over the sparse weekend trading session. Greece said the European Union’s and International Monetary Fund’s inspection of the country had concluded on a positive note, raising expectations of an interim solution to the Greek debt crisis.

The week ahead will no doubt provide the pound an opportunity to pick itself up with some key economic data such as Retail Sales (Tuesday), Trade Balance (Thursday), but the Bank of England rate announcement which is at noon on Thursday will grab the headlines as pressure on the 9 policy members to act on interest rates will likely be the key focus. Disappointment may ensue however, as rumours of stagnant interest rates until potentially February 2012 looks likely, with the increase of Quantitative Easing also being spoken of.

Against the US Dollar the pound is trading rather flatly today with comments from some trading insiders suggesting that we may see a move towards $1.63 prior to a spike up to $1.65 later this week.

The greenback was under broad pressure after data on Friday showed US jobs growth slowed sharply in May, reinforcing the view that the world’s largest economy is stuck in a soft patch and interest rates are likely to stay low well into the next year.

The positive for Sterling against the US Dollar is that there is expectation that the UK economy is likely to bounce back faster that the US, which will drive prices up in the medium term.