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

Monday October 8th 2007

By David Rapp - Proprietary Dealer

Sterling recovers… BUT is it short lived???

Sterling recovered last week following a 3 week downward spiral. Those who were prepared to react fast to the spike and take advantage of the best buying levels we have seen for 4 weeks have saved a small fortune. News of a potential bid for Northern Rock helped to bring back confidence to the market, while the Bank of England (BoE) left rates on hold, relieving those of you who were expecting a cut.

Key events of last week:

• BoE leaves UK rates on hold at 5.75%. Markets had been pricing in a 20% chance of a cut.
• Many are now suggesting that rates will be cut around 50 to 75 basis points by the end of 2008. Some are saying that we may see the first cut in rates as early as November.
• Data last week was on balance negative for sterling. Of particular note was the September Halifax house price index falling 0.6% on the month and a report showing the UK service sector growing at its slowest pace in more than a year.
• News also last week that profits at banking giants UBS, Citigroup and Credit Suisse will also suffer as a result of the credit market crises also dented confidence.

My own personal view is the current recovery in sterling may just be a correction. Sterling is under pressure from forecasts of lower UK interest rates over the next year. The UK economy’s fortune is heavily linked to both the Finance industry and the UK housing market. If, as we suspect, these areas suffer further, then sterling could come under increasing pressure.

USD & EUR Summary

GBP USD: Last week’s dollar strength appears to have been a corrective bounce. Even though the non-farms (a measure of new jobs created excluding those in the farming sector) were more encouraging, we must remember that they are retrospective. Expectations of further economic weakness and the fact that US rates are likely to be cut further should keep the dollar under pressure.

GBP EUR: It remains fairly clear that the ECB is still focused on inflation concerns and this should prop up the Euro all the while another rate hike has not been ruled out. However, some think it will be difficult for the ECB to consider hiking rates giving the prospect of slower growth and global political pressure from those worried about a strong Euro. Despite this Sterling looks the weaker of the two currencies so we expect the cross to continue lower this week.

Note from offshore-savings-accounts.org.uk: None of the information contained in this website constitutes, nor should be construed as financial advice.