At the beginning of last week a survey of 56 economists revealed 15 thought the

Monetary Policy Committee (MPC) would cut rates. In fact the city was pricing in a cut

at about 25% likelihood. But everything changed in the few days before the


By Thursday, GBPUSD and GBPEUR had both lost 2% as the markets turned dovish

and positioned for the most eagerly awaited rate announcement in years. What

sparked the sell-off was the release of significantly soft UK data. The Service PMI, (an

important release due to the size of the sector), showed a sharper than expected

slowdown and housing data continued to cool. HBOS reported the 3rd consecutive fall

in house prices in the last three months and the combined 3-month fall of 2.4% was the

largest drop in that timescale since 1992.

The Bank of England had already pared back their growth forecasts for next year and

they had signalled a rate cut for around February. But evidently the MPC felt they must

move early, and faced with recent statistics, who can blame them. The problem they

face is that while the credit crunch is slowing the global economy, and speculation of a

recession in the US mounts, loosening the economy is the right move. But oil prices

and food costs are likely to remain elevated and with them, Britain will import higher

inflationary pressure. This means that the Bank’s hands might be tied in the future if

they are faced with rising inflation. This is bound to frustrate Mervyn King, the governor

and a known hawk, who is unlikely to have voted for a cut. His view remains that longterm

growth and stability are a result of controlling inflation. But we already know Sir

John Gieve, the deputy governor and the man responsible for financial stability, voted

last month for a cut, so he was most likely sat in the dovish camp.

The full details of the vote will not be released till next week, but what is clear is that the

majority within the MPC deemed the risks of economic slowdown great enough to cut

early. A lot of the talk may be scaremongering, and of course it is extremely difficult to

forecast, but there is the possibility of the dreaded “r “ word. Much like the speculation

regarding the US, there are concerns that the UK could be on the verge of a recession.

Should consumer sentiment and Christmas sales fall, housing slump further, bonuses

in January disappoint, and the credit crunch continue to stifle business, then Britain will

do well to keep positive growth. Sterling in turn, will remain under pressure while data

is negative. Therefore, based on economic fundamentals, we do not see a significant

reversal in the downward trend, in the short to medium term.

The week ahead

The focus this week will remain on monetary policy with the rate decision from

across the pond. The Federal Reserve Bank is expected to cut rates by 25 basis

points but there has been some talk of a more aggressive cut. (50 bp cut priced in

at 30%)

UK Housing data will stay in focus this week. RICS house price balance and the

DCLG housing report are likely to continue to reflect softening in the.

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Currency Rates Low High Current

GBPEUR 1.3812 1.4105 1.43894

Jean-Claude Trichet and the ECB decided to hold Eurozone rates at 4%. In his post

decision press conference Trichet stated that Europe should be wary of increasing

inflation pressures and falling growth prospects, a cocktail known as stagflation.

Indications also showed that the change that most participants in the ECB were leaning

towards was a rate rise, putting a fairly large hex on thoughts of a cut anytime soon.

Consumer demand data fell over inflation fears and producer’s prices data showed an

increase of 3.3% as every indicator showed that the unease that has beset the single

currency recently is set to continue.

GBPUSD “Cable” 2.0217 2.0670 2.0435

There were 3 main stories that helped the USD last week, 2 of which Ben Bernanke

and the Federal Reserve had no bearing on. As reported last week, the news showed

that certain Middle East countries were looking to move away from their pegs to the

dollar; this however did not materialise and some semblance of dollar confidence

returned. The main decision last week was of course the BOE’s decision to cut rates by

25bp; a move that many market participants are expecting the Federal Reserve to

mirror on Tuesday. The one stateside piece of data that provided a backing for the

greenback was the ADP employment reading which was nearly 4x analysts estimates

which showed 189k people finding work in the month of November as supposed to a

market consensus of 50k.

Commodity currencies

The carry trade took a relative back seat this week as most commodity currencies were

influenced primarily by their central banks’ respective monetary policy announcements.

Low High Current

GBPAUD 2.3009 2.3680 2.3124

The Reserve Bank of Australian decided to hold rates at 6.75% last week after

concerns over the risk of falls in growth in 2008 may have weighed on the decision.

GDP figures came in strong for Q3 and the trade surplus surged to an all time high of

AUD2.98bln. Stock market rallies are typical towards the end of the year and this

should help AUD as investors attitude to risk softens and carry trade strength returns.

GBPNZD 2.5940 2.7128 2.6204

NZD had a fantastic week and hit 5 month highs against the USD and its Australian

counterpart. RBNZ Governor Alan Bollard warned that interest rates would have to

continue to stay high for longer to contain inflation helped underpin the kiwi. Some of

these gains however ebbed away towards the end of the week as profit takers cashed

in and a strong Non-Farms figure out of the US weakened the carry trade.

GBPCAD 2.0335 2.0909 2.0608

Canadian dollar weakened against the USD and all major G7 currencies last week after

the Bank of Canada decided to cut rates by 25bp. Data releases showed that the

business community is still bullish on the state of the economy as PMI rose to 58.7

from 57.1 the previous month. In the near term a drift away from parity is expected as

prospects of further rate cuts in 2008 come to the fore.

Low High Current

GBPZAR 13.5488 14.1266 13.62

Thursday saw the SARB hike interest rates by 50bp to 11.00%. This is the latest hike in

a cycle spanning 2 years and has moved rates by 400bp. However recent raises are

only now starting to have an effect as CPIX seen hitting 7.8% early next year. This

would solidify expectation that a further hike may take place in January or February of



Please see GBPEUR comments above. EURCYP is pegged in preparation for Euro

entry and so GBPCYP moves proportionally with GBPEUR. [Update: The Cypriot

government has allowed the currency to strengthen very slightly to 0.573 against EUR,

in light of market pressure. The pair is now stable here.]

Produced by Jabu Henson and Jeremy Cook ( 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.

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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.

This week’s data

Tuesday 11 December Previous Expected

US 19:15 FOMC interest rate announcement Dec 4.50 4.25

Germany 07:00 Wholesale price Index, % M/M Nov 0.5 (4.7 Y/Y) 0.7 (5.3


Sweden 08:30 CPI, % M/M Nov 0.5 (2.7 Y/Y) …

Sweden 08:30 CPIX, % M/M Nov 0.5 (1.4 Y/Y) 1.6

Sweden 09:00 AMS unemployment rate, % (nsa) Nov 3.2 3.1

UK 09:30 Trade balance, £bn Oct -7.8 -7.4

Germany 10:00 ZEW economic expectations index Dec -32.5 -34.0

US 15:00 Wholesale inventories, % M/M Oct 0.8 (5.2 Y/Y) 0.5 (5.4


Japan 23:50 Current account total, ¥ bn Oct 1530.3 …

Japan 23:50 Domestic CGPI, % Y/Y Nov 2.4 2.1

Wednesday 12 December Previous Expected

Norway 13:00 Norges Bank interest rate announcement,


Dec 5.00 …

UK 09:30 Headline average earnings, % 3m/y Oct 4.1 4.2

UK 09:30 Core average earnings, % 3m/y Oct 3.7 3.7

UK 09:30 Claimant count unemployment, change k Oct -9.9 -5.0

E13 10:00 Employment, % q/q Q3 0.5 (1.7 Y/Y) …

E13 10:00 Industrial production, % M/M Oct -0.8 (3.3 Y/Y



Canada 13:30 Int’l merchandise trade, C$ bn Oct 2.6 2.2

US 13:30 Trade balance, $ bn Oct -56.5 -57.3

US 13:30 Import prices, % M/M Nov 1.8 (9.6 Y/Y) 2.0 (11.0


US 13:30 Non-petroleum import prices, % M/M Nov 0.5 (3.2 Y/Y) …

NZ 21:45 Retail sales, % M/M Oct 1.0 0.0

Thursday 13 December Previous Expected

Japan 07:00 BoJ Deputy Governor Iwata speaks in Tokyo

Swiss 08:30 SNB interest rate announcement Q3 2.75 2.75

E13 09:00 ECB monthly bulletin Dec

UK 00:01 RICS house price balance Nov -22 -28.5

Australia 00:30 Unemployment rate, % Nov 4.3 4.3

Sweden 08:30 Unemployment rate, % (nsa) Nov 5.7 5.6

E13 10:00 Labour costs, % Y/Y Q3 2.5 …

UK 11:00 CBI industrial trends, total orders


Dec +8 +5

US 13:30 Initial jobless claims, thous (4wk mvg




338 (340) 335 (339)

US 13:30 PPI, % M/M Nov 0.1 (6.1


1.5 (6.1 Y/Y)

US 13:30 Core PPI, % M/M Nov 0.0 (2.5


0.2 (1.8 Y/Y)

US 13:30 Retail sales, % M/M Nov 0.2 (5.2


0.5 (5.2 Y/Y)

US 13:30 Retail sales ex autos, % M/M Nov 0.2 (5.2


0.6 (5.5 Y/Y)

US 15:00 Business inventories, % M/M Oct 0.5 (3.3


0.3 (3.4 Y/Y)

Japan 23:50 BoJ Tankan Q4 23/20 21/18

Friday 14 December Previous Expected

E13 07:00 New car registrations, % Y/Y (nsa) Nov 3.7 …

Germany 07:00 Final HICP, % M/M Nov 0.5 (3.3


0.5 (3.3 Y/Y)

Germany 07:00 Final CPI, % M/M Nov 0.4 (3.0


0.4 (3.0 Y/Y)

E13 10:00 HICP, % Y/Y Nov 3.0 Y/Y


0.5 (3.0 Y/Y)

E13 10:00 HICP ex tobacco, index (2005 = 100) Nov 105.12

(2.55 Y/Y)

E13 10:00 ‘Eurostat’ core (HICP x fd, alc, tob, ene),

% M/M

Nov 0.3 (1.9


E13 10:00 ‘ECB’ core (HICP x unproc.fd, ene), %


Nov 0.5 (2.1


0.2 (2.2 Y/Y)

US 13:30 CPI, % M/M Nov 0.3 (3.5


0.6 (4.1 Y/Y)

US 13:30 Core CPI, % M/M Nov 0.2 (2.2


0.2 (2.3 Y/Y)

US 13:30 NSA CPI, index Nov 208.936 209.777

US 14:15 Industrial production, % M/M Nov -0.5 (1.8


0.1 (2.3 Y/Y)

US 14:15 Industrial production: mfg, % M/M Nov -0.4 (2.1


US 14:15 Capacity utilization, % Nov 81.7 81.7


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 (ie in the labour force)

who are not employed.

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