they face a tough decision. On the one hand, it is clear that growth in the UK is slowing.

Last week’s housing and mortgage data showed activity continues to ease, and

consumer confidence was lower than the market expected.

In order to try and stimulate activity, the committee is going to want to follow the US

lead and cut rates. However the problem is world food and energy costs are on the up

and this is filtering down into the domestic economy. In addition, the credit crunch has

meant that financial intermediaries have been less flexible in their adjustment of

lending rates, and this means any shift by the BoE has a more delayed reaction.

In a perfect world, the MPC will want to encourage growth and arrest the inevitable

slowdown, possibly cutting rates by as much as 0.5%. But this would be in an ideal

world. In reality, they are shackled by the threat of rising inflation. Therefore we expect

to get a 25 basis point cut inline with the consensus. The pound as struggled over the

last couple of days as this change gets priced into the market.

The European Central Bank (ECB) faces a similar situation. However the size and

diversity of the economies within the union has meant growth has not suffered as much

as the UK. The market expects rates to be left on hold but the statement from the ECB

president, Trichet, will be of most importance. He is likely to reiterate his, and the

committee’s, concerns over rising inflationary pressure and distance himself from the

loosening of the US and UK. This outcome should provide the euro with even more

strength in the near-term. Ultimately, the ECB are likely to follow the other major central

banks and cut rates in the coming months but this has not been priced in and it is too

early for this change to materialise.

The BoE interest rate announcement will be the key event for the UK. As mentioned

above, consensus is for a 0.25% cut taking the base rate to 5.25%

The ECB will leave rates on hold at 4.0% but the conference will be crucial to get a

picture of what the committee’s thoughts are.

Members of the Reserve Bank of Australia (RBA) will also meet and decide on

monetary policy this week. The consensus is for a 0.25% hike taking their cash rate to

7.0%.

Eurozone inflation surged to a new record in January at 3.2%, official data showed.

The rate is much higher than the European Central Bank’s target of 2%. But some

analysts predicted that slowing job growth would dampen the risk of inflation from

spiralling further, and allow the ECB to lower interest rates from their current level of

4%.

The US has seen the first decline in employment since August 2003, providing fresh

evidence that the US economy could be entering a recession. The unemployment rate

fell to 4.9% from 5% in December, a two-year high, but overall the number of people in

the labour force declined. The Federal Reserve cut interest rates to 3% from 3.5% on

Wednesday. It followed an emergency unscheduled cut last week, when the Fed

slashed the cost of borrowing by the largest amount in 25 years to prevent the

economy from slowing further. President George Bush acknowledged that the US

economy was going through a rough patch and urged lawmakers in Washington to

pass an economic stimulus package. Despite these worrying signs for the US economy

Dollar did strengthen on the back of an improved ISM manufacturing figure of 50.7

versus 47.3 expected. Any figure above 50 demonstrates an expansion in the

manufacturing sector and as a result Cable has fallen from the 1.99’s to the mid –

1.97’s.

The Australian and New Zealand economies are riding the US and UK slowdowns well.

Apart from the odd “high-yield” selling spree which tends to be triggered by risk

aversion, we expect to see the Antipodean currencies remain firm against the dollar

and the pound. This week the highlights will be New Zealand labour figures and the

Reserve Bank of Australia rate announcement. The latter is expected to raise their

cash rate by 0.25% to 7.00%.

AUD saw a sharp boost on Friday, with the move to risk willingness in equity markets.

The AUD’s across the board rise came despite a 14 dollar fall in gold prices. The

market seems to be sending a mixed message at the moment, with AUD focused on

risk and USD focused on gold. The market is heavily pricing in a 25 bpts hike to 7%. A

‘no change’ in the rate decision will leave AUD very vulnerable.

December’s building consent volumes fell 5.2% after a flat month before. On the whole,

housing data moderated slightly which is consistent with the high interest rates and the

RBNZ aim. This news had little effect on the Kiwi dollar but Thursday’s trade balance

release offered some encouragement. The dollar edged firmer after the headline trade

balance pushed to a $33m surplus versus a $190m deficit expected.

GBPNZD battled as the pound sold off aggressively in the latter part of the week.

Negativity continues to surround sterling ahead of the Bank of England interest rate

announcement. The consensus is that the Bank will cut rates at a measured pace as

global food and fuel prices are forcing higher inflation levels. Nevertheless, the market

has priced in slightly more than a 0.25% cut for Thursday and this has put more

pressure on GBP.

The Canadian dollar lost ground to the pound mid week and the pair pushed up over

2.00. This all changed later on as the sell-off in sterling brought the pair lower again.

Canadian GDP was on expectation at 0.1%. It is a quiet week this week with only

Labour and housing data due for release. This pair’s movement will largely be

defendant on the UK MPC announcement.

Temporary mine closures and the lack of electricity battered the rand last week. Eskom

met with the government and some representatives from the mines to try and work

some sort of solution. Talk of energy saving and taxes on high users did little to

encourage. This week should be considerably quieter, but we continue to expect the

ZAR to stay under pressure.

to contact me at anytime regarding these briefings, if you have any questions or thoughts on

them, or if you are interested in a particular event in the calendar.

Please call us on 0800 001 5055 if you have any questions or would like to discuss the markets.

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The above comments are only our views and should not be construed as advice. You should

act using your own information and judgement. Although information has been obtained from

and is based upon multiple sources the author believes to be reliable, we do not guarantee its

accuracy and it may be incomplete or condensed. All opinions and estimates constitute the

authors own judgement as of the date of the briefing and are subject to change without notice.

Any rates given are interbank and therefore for amounts of £5million and so are not indicative of

rates offered by World First for smaller amounts.

GBPUSD, move as any combination of two of these rates must produce the third in order to satisfy a

condition known as No Arbitrage. If there are movements in two markets, then the third must move

deterministically. Also knows as triangulation.

higher yield economy (Australia). This yields a certain profit unless the interest rate differential narrows, or

the exchange rate moves such that it costs more to buy the currency back.

Macroeconomic models (such as eCIP).

elements like energy and luxury consumption leaving the ‘boring’ elements like utility bills and food.

[Quotes from BoE governor Mervyn King]

Interest Rate Traction: Although there is a group of people who announce an interest rate, it has to feed

through the economy through some very complex and poorly understood channels. Once rate hikes are

having an effect on inflation and long term yields it is said that they are finding traction with the economy.

who are not employed.

Participation rate: The percentage of the population of working age in the labour force.