STERLING OUTLOOK CLOUDED BY TEST OF PARIS ACCORD

  The move by foreign exchange markets to
  test the strength of the Paris currency accord has thrown into
  question the near-term outlook for sterling, until recently one
  of the main beneficiaries of the agreement, analysts said.
      Since the six-nation accord last month, sterling has risen
  sharply, adding almost five pct on its trade-weighted index.
      While the accord effectively stifled dollar/yen and
  dollar/mark movements, the markets turned their attention to
  sterling as foreign investors rushed to take advantage of
  relatively high U.K. Interest rates.
      But analysts say the pound has been sidelined by the first
  tentative test of the Paris accord seen yesterday.
      The market now looks set sooner or later to push the dollar
  down further in a test of the willingness of central banks to
  intervene. Analysts say if the banks do not intervene
  effectively, the Paris accord could collapse.
      "On balance, sterling would be a net sufferer if G-6
  collapses," Phillips and Drew analyst Stephen Lewis said.
      He said sterling would lose out as markets turned their
  attention to capital movements whereas previously they had been
  restricted to looking only at the interest yield on currencies.
      However, although most analysts and foreign exchange
  dealers were forecasting a brief period of consolidation or
  even retracement for sterling, none were expecting a very sharp
  drop in the U.K. Currency.
      Sterling remained supported by optimism on the U.K.
  Political and economic outlook, firmer oil prices and
  relatively high interest rates, they said.
      Bullish sentiment on the U.K. Economic outlook has been
  running especially high after last week's budget, seen as
  popular both with the markets and with British voters.
      Sterling was also supported by signs of a weakening in the
  West German and Japanese economies, where growth for 1987 is
  trailing behind the three pct forecast for the U.K.
      Recent opinion polls showing Britain's ruling conservative
  party ahead of opposition parties in popularity have also
  supported the pound.
      In addition, sterling has so far shrugged off two
  half-point cuts in U.K. Bank base lending rates in less than
  two weeks. A further half-point cut, widely expected in the
  next week or so, has already been largely discounted.
      U.K. Base rates, now running at 10 pct, are still
  relatively high compared to other western countries, and
  analysts said a further base rate cut to 9-1/2 pct was unlikely
  to affect sterling.
      Sterling today appeared resilient to the dollar's decline,
  dropping only slightly on a cross-rate basis.
      Worries about renewed turbulence in the foreign exchange
  markets, however, were reflected in the U.K. Government bond
  (gilt) market, where prices dropped by up to 5/16 point.
      Until now foreign investor interest in the gilt market has
  been one of the major reasons behind the rise in sterling.
      Dealers said they expected the pound to hold quietly steady
  for the next few days while the market awaits further
  developments on the dollar and this Thursday's U.K. Current
  account figures for February.
      Market forecasts are for a deficit of around 250 mln stg
  after January's small surplus.
  

