Currency market updates - from Foreign Currency Direct (www.currencies.co.uk)

Monday 3rd September 2007

By Alex Robertson - Regional Development Executive

The US ($)

Recent figures released have shown that inflation in the US grew less than expected in July, increasing the possibility of a cut in US interest rates this month. Core US consumer prices, which exclude food and energy costs, rose by 0.1% in July, compared with market expectations of a 0.2% expansion.
Analysts said the 0.1% figure should give the Fed the room to lower rates to help ease the current market turmoil. The base US interest rate is currently set at 5.25%, where it has been for more than a year.
Federal Reserve chairman Ben Bernanke also gave his assessment of the state of the housing market and the impact it has been having on the US economy, on Friday. The speech is being pored over for clues about whether there will be a cut in US interest rates at the Federal Reserve's rate-setters' meeting on 18 September.
‘The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets.’  Said Bernanke.
A number of analysts now expect the Fed to make a cut to 5% at its next rate-setting meeting on 18 September.
Such a reduction would help ease the current credit squeeze in the financial sector centred on a slump in the sub-prime mortgage industry.

Europe (Euro)

The European Central Bank is set this week to express confidence in the underlying strength of the eurozone economy even if, as expected, it shelves plans for a rise in interest rates.
Jean-Claude Trichet, ECB president, is preparing for one of the least predictable interest rate meetings since he took office in November 2003.
Mr Trichet will calibrate his assessment carefully. A rise in interest rates this week would jolt financial markets, something the ECB would want to avoid.
Some believe, including French President Nicolas Sarkozy that an interest rate rise at this time would be damaging for European growth. Ken Wattret, economist at BNP Paribas, argues "There seems little for the ECB to gain in hiking rates at this point in time but plenty to lose, given the risk of exacerbating the current turmoil."
If interest rates do not rise this week, October may remain a distinct possibility, although the impact of financial market turbulence may take longer to assess.
Many of our regular readers may be aware that an interest rate rise may lead to an improvement in exchange rates. This is due to an increase in foreign investors in the chosen currency due to a higher return on funds.

With the FED expected to lower their base rate on interest rates later this month, we may well see the current attractive exchange rates for £ to USD stay firm. For those of you with a USD requirement it may well be in your interest to secure your rate of exchange on either a spot or forward contract while we are currently trading at near  record highs.
In contrast the European bank are potentially increasing their base rate later this week or in early October, as this decision gains momentum and is priced into the market we may well see the exchange rates for £ to Euro begin to worsen. If you like so many others are in the process of buying a property in Europe, it may well be in your interest to purchase your Euros before we potentially see the rates of exchange for £ to Euro drop away.
The week ahead

06/09/07
12:00 The Bank of England Interest Rate decision.
12:45 The European Central Bank Interest rate decision

07/09/07
13:30 Non-farm payrolls and unemployment data released.