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
• 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.
0207 801 9084
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.
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 (email@example.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
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
E13 10:00 ‘Eurostat’ core (HICP x fd, alc, tob, ene),
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.