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

Thursday September 6th 2007

By David Jones - Executive Dealer

Bank of England Helps in The Credit Crunch

The bank of England has increased the amount of money banks can deposit with it and then use when they need overnight funding. The move could ease the rates banks are charging each other for short-term loans, which have soared on worries about risky investments. However these Libor rates remained high despite the intervention, the British Banking Association said.

The Bank of England's move means that when banks need additional funds they will be able to draw on the extra money they are now effectively saving with the Bank of England, this could make them less reliant upon having to borrow extra funds from other commercial lenders on the so-called overnight borrowing markets, where the interest rates charged have recently been substantially above the Bank of England's current 5.75% base rate.

The Bank of England has increased the amount of funds banks can deposit with it by 6% to £17.6bn, and said it was prepared to increase this by a further 25% if needed.

BBC Business Editor Robert Peston said that this is "big news".

"In crude terms, the Bank of England is basically providing additional cheap finance to the banks to meet any short term requirements they might face," he said.

An increase in the reserve requirement is in affect an increase in lending to banks at the base lending rate of 5.75%. It represents a significant increase in the liquidity of the banking system and relieves pressure on the banks to borrow at the higher penalty rate (Libor) of 6.75%."

Data out Yesterday showed that UK services sector activity accelerated unexpectedly in August and housing data from HBOS Plc said the annual 3-month rate of house price inflation edged up to 11.4 percent in August.

The run of strong data appeared suggesting Britain's economy was coping well with the market turmoil and may rise at a faster rate than previously thought in the third quarter, challenging many analysts' view that BoE interest rates have likely peaked.

Before the BoE announces its rate decision at noon today, markets could glance at the 9.30am release of July industrial and manufacturing output numbers for further clues about the strength of the real economy.

Euro Zone Interest rate Decision

The European Central Bank is expected to leave eurozone interest rates unchanged at 4.0% today. Investors will be eager to hear ECB President Jean Claude Trichet's comments on the outlook for monetary policy following the upheaval in financial markets.

Typically the ECB lets the market know at least a month in advance what they plan on doing with interest rates. This time however, Trichet and company will have traders guessing up to the last second. There are three potential outcomes of this much anticipated rate decision.  The first and the most unlikely is for the ECB to raise rates to 4.25%. This surprisingly hawkish move would be extremely positive for the Euro, the second scenario is for the ECB to leave rates at 4 percent, and use the words strong vigilance and add some other dovish comments that would allude to interest rates remaining unchanged for the remainder of the year. This would be extremely bearish for the Euro, The third scenario would be for the ECB to leave interest rates unchanged and either keep the words strong vigilance or other equally convoluted and slightly hawkish comments, which would leave the door open for further rate hikes and be only slightly bearish for the Euro.