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Forex - Pound enjoys brief respite after BoE keeps interest rates on hold UPDATE

Thu, May 8 2008, 11:54 GMT
http://www.afxnews.com

(Updates prices, adds analysts' comments,

LONDON (Thomson Financial) - The pound enjoyed a brief respite after the Bank of England (BoE) decided to keep interest rates unchanged, but quickly retreated as market expectations remained intact that the central bank will deliver a cut next month instead.

The decision by the BoE to keep its benchmark Bank Rate on hold at 5.00 percent was expected, but financial markets had priced in a small probability the nine-member Monetary Policy Committee (MPC) may cut borrowing costs by a quarter point for the second month running following a recent run of weak data.

"Cable elicited a ... knee-jerk boost from the unchanged BoE MPC base rate decision, as some short-term short pound positions were exited," said Robert Howard, analyst at Thomson IFR Markets.

The pound briefly strengthened to $1.9611, and to 0.7826 pounds per euro, but was unable to sustain gains as the decision failed to dent the markets' view that the central bank will cut interest rates next month instead.

"The MPC is very aware of the downside risks to growth and a recent stream of weaker data and survey evidence relating to consumer confidence, retail sales, the housing market, the services sector and manufacturing activity suggest that the UK economic downturn is deepening and widening," said Howard Archer, chief UK economist at Global Insight.

"It seems odds-on that the Bank of England will trim interest rates from 5.00 percent to 4.75 percent in June, thereby maintaining the trend of cutting by 25 basis points every two months," Archer added.

At 12.31 p.m., the pound was weaker at $1.9567 from $1.9573 prior to the BoE's decision. The euro rebounded to 0.7843 pounds from 0.7840 pounds before the announcement.

chinny.li@thomsonreuters.com

cml/jlc/cml/am

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