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

Note from offshore-savings-accounts.org.uk: None of the information contained in this website constitutes, nor should be construed as financial advice. This report comes directly from the team at Foreign Currency Direct and is intended for information only.

 

Monday October 15th 2007

By Gavin Beale - Senior Executive Dealer

Last Week in Brief

Sterling strengthened on Friday as unexpectedly positive US economic data bolstered the global economy, supporting the Pound.

U.S. retail sales rose more than expected, supporting the view that the Federal Reserve will not cut interest rates when it meets later this month.

"The U.S. economy looks to be in a healthier position than many thought and this benefits the global economy," said Kamal Sharma, currency strategist at Bank of America. "This benefits the pound as the UK economy is very tied into global growth."

In the early afternoon on Friday, the pound was up 0.1%t versus the dollar and gained 0.2% against the Euro. This short-term strength for the Pound came as a welcome let-up in what seems to be a time where the UK has been experiencing an economic monsoon season.

We still see favorable rates as Sterling holders, but don’t let yourself get caught watching, this is the lowest that Sterling has been against the Euro since May 2005 (as the arrow in the graph below illustrates) and the highest we’ve seen against the US Dollar in nearly 26 years.

The question you need to ask yourself is whether you believe the gamble of the market improving further, outweighs the risk of it dropping further?

The UK, with the highest interest rates in the ‘Group of Seven nations’ (comprising; Canada, France, Germany, Italy, Japan, Russia, USA and UK…now known as the G8 after Russia formally joined in 1997) at 5.75 percent, gains from the carry trade where investors borrow low-yielding currencies like the Yen to fund purchases of higher yielding assets like Sterling. Being part of the G7 and having the highest interest rate in the group means that investors are inclined to invest here partly for profitability reason and security as well.

As an overseas property purchaser, you should certainly be concerned at recent fluctuations of Sterling and the possibility of further movements; after all, the investment of speculators money and the effect that has on the economy can severely alter how far your Sterling will get you when converting to another currency.

Market expectations for UK rate cuts fell earlier in the week when Bank of England Governor Mervyn King said Britain's economy would need to slow over the coming year to keep inflation risks at bay.

Data released on Thursday showing UK house prices fell has revived expectations that rates may be cut. Investors will look to data this week’ for more clues on further rate movements.

What to expect this week?

There are many important economic events scheduled for this week, with some key measures of inflation due.

Let's take a look at those likely to move the markets:

- Today, there are no major economic events scheduled, however taking a look at Thursdays data from the Royal Institute of Chartered Surveyors (which indicated the UK house prices are falling at their fastest pace in two years), Sterling is likely to see further volatility following this mornings release of Rightmove’s UK house price index.

- On Tuesday, we start the day with UK's CPI and the Euro Zone CPI. This busy day will finish with the NAHB (National Association of Home Builders) Housing Index release; this is for the American housing market and will show if the growth rate of the housing market affects the USD volatility.

- Wednesday sees the minutes from the BoE rate decision meeting. Next is the US CPI.

- On Thursday, the UK releases retail sales figures, providing further speculation as to where next months interest rate decision will be headed.

- On Friday, Germany starts with the PPI, UK continues with the GDP figures and finally we have a testimony by Ben Bernanke in an economic forum... the biggest event out of the US.

This week is a very busy time with a mass of very important market data due. It is inevitable that Sterling will have some movement on the back of it, what is not certain is which way it will go.

Short-term currency requirements are at risk whilst the market is pointing in multiple directions whilst the longer term appears even less clear.