Mervyn King, fresh from the announcement that he will leading the MPC for another 5

years, decided to cut rates last week by 0.25% to 5.25%; a move widely expected by

the market. The accompanying statement detailed the bank’s concerns over the

slowdown and tightening of credit markets and the ensuing dent made to consumer

confidence. With the CPI figure already above target at 2.1% the policymakers are very

rightly concerned over the spectre of rapid inflation; the committee says, with higher

food and energy prices “expected to raise inflation, possibly quite sharply, in the

coming months”. This is not entirely surprising given the record prices in ‘soft’

commodities such as wheat, corn and meat the market has seen over the past 12

months. This, combined with petrol prices safely over the £1 per litre mark, is a

particularly dangerous recipe. The dish that may be served is stagflation; the

phenomenon of rising inflation but falling growth, an unpleasant concoction for any

economy.

Wednesday will see the Bank of England publish its February Inflation report. With

sterling having fallen 7% against the dollar since the previous meeting in November

against the projected 1.6% fall over 12 months and that the FTSE 100 is down 50% on

an annualised return the MPC is in a sizable quandary. Any further signals towards

monetary policy loosening may be predicated on Tuesday’s CPI figure which is

forecast to rise again to 2.3% and this morning’s PPI figures forecast to rise as well.

These may be however not enough to move forward any potential cuts with the

majority seen in Q3 taking the rate down to 4.5% – 4.75% by Christmas ’08.

After a fairly quiet week across the pond, we have a jam-packed few days of US data

none more important than Wednesday’s US retail sales figures. A rise is expected after

December’s dire reading however anything below market expectation combined with a

weak University of Michigan Consumer Confidence reading could spell disaster for an

already weak US economy.

The week ahead

As mentioned above, the key pieces of UK data this week are the February Inflation

Report combined with Monday’s PPI and Tuesday’s CPI / RPI readings.

The ECB also publish their monthly report this week albeit on Thursday. The

indications from the press conference after the most recent rate decision show that

although the beginnings of a slowdown can be seen in recent falls in retail sales figures

the ECB have moved to a rate neutral policy stance.

Economic Research

0207 801 3023

j.cook@worldfirst.com

Currency Rates Low High Current

GBPEUR 1.3253 1.3467 1.3394

Last week the Euro posted its worst performance in 18 months against the dollar. Most

startling was the move of the Eurozone PMI index which showed a drop from 52.0 to

50.6. The German, Spanish and Italian all showed readings of below 50.0 signifying a

contraction in activity with France the only main Euro economy continuing expansion.

Retail sales figures fell for the 3rd month running due to an EU-wide fall in consumer

confidence.

GBPUSD “Cable” 1.9385 1.9786 1.9503

Although the US economy is taking a beating, the Dollar has been strengthening

against most currencies due to an influx of investment in US government treasuries in

anticipation of choppier seas ahead. As with the EU, the US PMI index tumbled to 41.9

from a prior reading of 54.4, the lowest since 2001 and a cast-iron signal that recession

is almost inevitable if it hasn’t already started. In other news, Factory orders rose

2.03% following strong durable goods figures previously and although the number of

continuing claims stayed at a 2½ year high Jobless Claims fell 5.8%.

Commodity currencies

AUD and NZD managed to stay fairly stable last week as monetary policy tightening in

Australia enabled antipodean currencies to bypass any weakness associated with the

impending global slow down.

Low High Current

GBPAUD 2.1504 2.1999 2.1507

The RBA raised the cash rate to 7% from 6.75% over inflation concerns although did

pay credence towards a slowdown sometime in 2008. Retail sales rose however by

0.5% with a large fall in building approvals also crystallizing. Investment into AUD is

probable given the high yield however it will be the victim of any negative carry trade

sentiment.

GBPNZD 2.4475 2.5206 2.4861

Kiwi benefited from a rate rise across the Tasman Sea and stronger than expected

wage data last week. Any worries of carry trade weakness affecting NZD was

counteracted by a supremely strong job creation figure which showed an increase of

1.1% against the predicted forecast of 0.4%. We will see this week how the New

Zealand inflation situation is looking as we expect both PPI and Retail sales figures

due.

Low High Current

GBPCAD 1.9346 1.9801 1.9660

The Loonie flirted in and around parity with its US counterpart last week and was

underpinned by some strong fundamental data. PMI showed a strong bounce back

from below 50.0 to 56.3 easing recession fears. Falling Crude Oil prices also weighed

on CAD as will fears of a global slowdown.

GBPZAR 14.388 15.297 15.208

Recession fears are rife in Africa’s largest economy after rolling power outages have

hammered the mining sector with reports of ZAR 300mln being lost a day due to the

cuts in working hours on safety fears. Thabo Mbeki has appeared on national television

appealing for calm and in his ‘State of the Union’ address made it clear that the “era of

cheap electricity is over”. With no policy or economics data due this week, the Rand will

be at the whim of global movements and some consolidation above 15.00 may be

experienced.

Produced by Jeremy Cook (j.cook@worldfirst.com) Please feel free 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.

Please reply with REMOVE in the subject of your e-mail if you would like to be removed from

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Notes:

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.

Definitions

Bull/Bullish: one who thinks a market, currency or asset will appreciate

Bear/Bearish: one who thinks a market, currency or asset will depreciate

Pip: the fifth significant figure of a currency price: 1.2345

Big figure: the third significant figure of a currency price: 1.2345

Basis point: a 0.01% unit

Tightening (Interest Rates): raising interest rates (loosening is opposite)

Hawkish: comments that suggest interest rate tightening i.e. moving higher

Dovish: comments that suggest interest rate loosening i.e. moving lower

MPC: Monetary Policy Committee, the body that sets UK interest rates

ECB: European Central Bank, the body that sets the Eurozone interest rate

RBA: Reserve Bank of Australia: the central bank of Australia.

Cross-Currency Pair Flow: Where a set of three interlinked rates, e.g. GBPEUR, EURUSD and 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.

Carry Trade: Simply put, is the borrowing of money in a low interest economy (Japan) and investing it in a 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.

Fair Value- Also called financial fair value: A measure of the theoretical exchange rate using certain Macroeconomic

models (such as eCIP).

Underlying Inflation: A somewhat academic measure of long-term inflation- removing all the’ interesting’ 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.

Unemployment rate: The percentage of people who are able and ‘willing’ to work (i.e. in the labour force) who are not

employed.

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