Rate Increase Less Likely say Analysts

Good Morning.

We start the day looking ahead to the Bank of England Policy Meeting, with the market players now warning of downside as expectations of a rate hike throughout 2011 may have been overestimated.

We did see a slight increase for sterling but gains were limited as the cloud of today’s noon announcement looms ever nearer.

Chances of a rate increase were yesterday slashed to 15% from 30% at the beginning of the week, as rumours of the MPC not acting until May took over much sentiment.

This May hike has been largely priced into the market already which has led to a built-up of speculative long positions in the pound but analysts say that creates risk of downside.

Currency strategist at UBS Chris Walker commented; “Given that the market has gotten ahead of itself in terms of pricing in a rate hike, any risk for sterling is to the downside”.

Rates being kept on hold could push the pound below $1.60 against the US Dollar and towards €1.17 so caution is advised this morning for any sellers of Sterling.

Data in the UK yesterday showed Britain’s goods trade deficit hitting a record high in December as imports of aircraft jumped ahead of a change in the VAT, and bad weather caused disruption at airports and ports.

The figures seem to agree with the sharp fall in the UK GDP at the end of 2010 and may raise concern among economists that Britain’s recovery is slowing. This would feature in the decisions that the Bank of England make regarding an increase in interest rates, and likely make them cautious of acting too soon.

The euro slipped against the dollar overnight, pressured by fading prospects for a European Central Bank rate hike while a boost the previous day from falling US bond yields proved short-lived, fuelling expectations tat it will stick to its well-worn range.

I will write an update after the Bank of England noon announcement in London with the immediate market movement.