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

Friday September 7th 2007

By Tom Higham - Team Leader

Thursday’s Trading

All eyes yesterday were on the Bank of England (BOE) and European Central Bank (ECB) with the interest rate announcements made at 12:00 and 12:45 respectively. As expected the BOE kept interest rates on hold at 5.75% however, more unexpectedly they released an accompanying statement only the third time this has happened when rates were kept on hold. The statement confirmed the Monetary Policy Committee (MPC) had considered the impact of the recent credit crunch and as many analysts had anticipated they were keen to see the full outcome of the recent turbulence. Earlier in the year expectations were that UK interest rates would hit 6% but this now seems unlikely with The British Chambers of Commerce saying that the MPC needs to go further than just keeping rates on hold: "Simply keeping rates on hold today is not enough, if the decision is interpreted as a mere short-lived postponement," said its economic adviser David Kern. "The MPC must acknowledge that further interest rate increases should now be off the agenda, at least for the time being."

With the possibility of an interest rate hike in the UK partially priced into the market we saw Sterling loose ground against a basket of major currencies in the afternoon. Now with the likelihood of any further interest rate hikes in the UK before Christmas reducing considerably we may see Sterling continue to decline.

In the Euro Zone rates were also kept on hold with Jean-Claude Trichet, the ECB president stating that they also were concerned with the recent credit crunch and that they were not willing to move exchange rates before the full outcome of the recent volatility is known. However, in the press conference held after the announcement, the ECB’s president did not rule out the possibility of further rate hikes before the end of 2007, stating that the Bank will monitor “very closely” price risks in the next months, he added that the Bank’s monetary policy remains still on the “accommodative side”.

This week also saw the central banks in Australia and Canada keep their interest rates on hold due to the unsettled markets. So while even the heads of the central banks around the world are unsure of how the markets are going to move in the coming weeks and months it is probably a good indication that it is not a good time to be gambling on the currency markets.