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

Monday September 17th 2007

By James Lovick - Senior Executive Dealer

Friday's Movers

GBP vs EUR:     -0.70%
GBP vs USD      -1%
GBP vs CAD      -1.35%
GBP vs AUD      -1.30%
GBP vs NZD      -0.9%

Rock Crumbles, Sterling Crashes!

Just when you thought the markets were getting back to normal the Pound slides to a 14 month low against the euro on Friday.

We took substantial losses against most of the major currencies throughout last week whilst taking a hammering on Friday. It was a particularly nasty end to the week with Northern Rock in dire straits as covered by the media; its shares crumbling by up to 30% on Friday alone after having to seek emergency funding from the Bank of England. It has so far become the biggest British casualty in the crisis, which has hit global markets and really does highlight how far these problems from the US have come. It also demonstrates how these conditions can have such a negative impact on the pound! The panic continued over the weekend for the many account holders trying to withdraw their funds. Even in Golders Green there were scenes of chaos as anxious savers queued to withdraw their life savings. At this stage there has been an estimated £1.5 billion withdrawn already.

This was the first time the central bank has acted as a lender of last resort since the current system was set up in 1998.

Approved by the Chancellor of the Exchequer, it is the most dramatic illustration to date of how the British banking sector is being hit by the wave of turmoil that has paralysed the money markets.

Many traders fear that the Rock is not alone and that other banks may not be as stable as once thought.

2nd Bout of Weak Housing Data

The pound was put under further pressure on Friday after weak data on the UK housing market was released ahead of schedule. The Rightmove house price index fell 2.6 percent on the month after a rise of 0.6 percent the previous period. The data which was due for release early today was reported ahead of schedule on a property website.

It provides further evidence that the UK property market could be cooling fast.
 
It was only earlier in the week that a survey from the Royal Institute of Chartered Surveyors showed house prices fell in August for the first time in two years as new buyer enquiries fell at their fastest pace since August 2004.
 
This evidence of a housing slowdown has prompted many traders to predict that the Bank of England could even start cutting rates from their current level of 5.75% from next year, which could see sterling fall further against major currencies, such as the euro and dollar.
 
The Week Ahead

A busy week with major releases and the continuation of the banking crisis.

European Trade balance is at 10:00 this morning.

The key data however starts tomorrow at 09:30 with UK August inflation figures. Anything out of the ordinary could see big movements for the pound highlighting the possible future direction of UK interest rates. Tuesday night and we shall see what the Federal Reserve decide to do with regards to the biggest debate in the currency markets. Will Bernanke cut rates to try and calm these markets? A 25bp cut could be described as putting a band aid on the subprime and credit crisis while a 50bp cut would represent an aggressive move by the Federal Reserve to tackle the problem before it worsens.

The minutes from the September MPC interest-setting meeting (Bank of England) are released on Wednesday.