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

Friday September 28th 2007

By Aidan Kilvington - Senior Executive Dealer

Brief Respite for Sterling

Yesterday saw Sterling recover some of the losses made over Wednesdays trading as housing data released early on in the day was slightly higher than expected.

The data showed that UK house prices rose by 9% in September which, although is the lowest for the last 12 months, was still marginally higher than the 8.8% that the consensus predicted.

The report issued by Nationwide suggested the recent slow down in the housing market is down to interest rate increases over the last 12 months. Although they added that the recent issues in the financial markets would

“Undoubtedly... take the froth out of the market”

In more simple terms, the recent increases in interest rates are now appearing to be taking effect; however, with the average house price now standing at nearly £185,000 for the UK it is becoming increasingly more expensive for buyers to get on the property ladder. This can lead to mortgage lenders increasing their “High-risk” lending to customers, but in doing so it seems that they are creating problems for themselves with liquidity – see Northern Rock for example. This in turn is having a knock on effect to the financial markets and the currency markets, mainly a negative one.

So much so that many mortgage lenders are increasing their lending rates independently of the BoE so that it is harder for high risk customers to borrow beyond their means (in some cases up to 5 times your annual salary) protecting the lenders liquidity.

This coupled with the fact that none of the financial institutions took advantage of the Bank of England’s £10bn loan offer (although, this was largely down to the individual institutions not wanting to lower credibility and it being extremely expensive) meant that Sterling rallied off the previous lows.

“The housing numbers this morning were a relief for sterling, but actually it's a dollar weakness story” said Audrey Childe-Freeman European economist at CIBC world markets.

Over the day Sterling gained roughly 0.5% against the US Dollar and 0.2% against the Euro.