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

Thursday October 11th 2007

By Michael Vaughan - Senior Executive Dealer

Sterling had a mixed day’s trading strengthening nearly 0.3% against the USD but weakening further still against the Euro at nearly 0.1% on the day bringing to a halt sterling’s recent spike with the euro now having lost nearly 0.5% in the last two days trading.

UK

Sterling gained against the dollar on Wednesday, as expectations grew that the Bank of England may not cut interest rates in the short term given lingering inflationary pressures. In contrast, recent comments by Federal Reserve officials suggested there was still room for it to ease its monetary policy to contain the impact of a U.S. housing downturn.

On Tuesday, BoE Governor Mervyn King gave no indication the bank will have to cut rates to ease an economic slowdown or help the business sector cope with the ongoing credit crunch. He said that while tighter lending conditions could result in a further credit squeeze, he still believed that Britain’s economy needed to slow over the coming year to keep inflation risks at bay.

Before King's speech, markets had priced in at least one rate cut before the end of the year in the wake of troubles at distressed mortgage lender Northern Rock.

"King has made it clear that he wants to help the current situation (global credit crisis) through the money markets and not by cutting rates," said Divyang Shah, head of FX strategy at Commonwealth Bank.

Other News

Conservative leader David Cameron has said Gordon Brown looks like "a phoney" as they went head-to-head in their first Commons battle since July. The clash came with the PM facing claims he "bottled" a snap election and stole Tory policy ideas on tax.

In defending his decision not to call an early election the Prime Minister suggested that he has so far been unable to set out his vision for the country because his brief time at Number 10 has been dominated by the events and crises including terrorism attacks, foot and mouth disease and the floods.

In response George Osborne (Shadow Chancellor) was quoted as saying,

“The Prime Minister talks about setting his own vision of the country, but he has to wait for us to tell him what it is”

Yesterday’s Commons meeting followed Tuesdays Comprehensive Spending Review and the Pre-Budget Report released by Chancellor Alistair Darling. In a highly politicised statement the Chancellor tried to steal a march on the conservative’s well- received tax proposals in an attempt to gain the upper hand in the battle for marginal voters. Key points included:

• Growth forecast cut by 0.5%
• Tax receipts down by £1.8bn, public sector net borrowing up by £4.3bn
• Inheritance tax threshold raised to £600,000 for married people or those in civil partnerships
• Crackdown pledged on "non-domicile" tax payers
• 10% tax rate on private equity capital gains abolished so private equity bosses pay more
• Green taxes on flights not passengers from 2009

On the wider economy, Mr Darling said the background to his first pre-Budget report was one of "increased international economic uncertainty and a more fragile global environment".

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