The year ahead looks bleak for the UK. Statistics and speculation have pointed to

significant slowing of growth in 2008. A number of factors will combine to put pressure

on economic activity, and household consumption is likely to wane as the year unfolds.

Firstly, a slowing in the housing market will mean a stagnation of asset prices and this

should restrict consumer confidence. Home owners have enjoyed strong growth in the

market over the last three years and this has fuelled both borrowing and spending.

Secondly, confidence has been dented by the credit crunch, Northern Rock and the

global fallout from the US sub-prime market. Slowing in real income will also impact

negatively on consumption and analysts are looking for a sharp fall in growth in ’08.

Average GDP for 2007 was 3.1% and this is expected to fall to 2.0% this year. The

Bank of England was on the verge of raising the base rate to 6.00% in the summer and

now forecasts are for 4.75% by the second quarter.

What does this mean for the pound? Sterling starts the year firmly gripped in a

downtrend. The market is clearly GBP bearish and from the information above it is

clear why. The unwinding of interest rate expectations was the first blow. The pound

was overpriced at 2.07 to the dollar and this has retracted significantly to start the year

in the mid 1.90s. The major lows have been seen against the euro, which has ridden

the global turmoil well and established itself as the go-to currency in the midst of dollar

and sterling negativity. GBPEUR is trading at a 10 year low, at 1.315 and the lowest

levels since the common currency’s general release in 1999.

We expect the negativity to continue until we see a little sunshine through the gloom.

Data will have to pick up and the Bank of England hold off their rate cuts in this first

quarter, before we break the trend.


The week ahead


In light of the above, this week’s main release will be the December retail sales figures.

Retail outlets began their sales even earlier this year in the hope of boosting activity.

But we have already heard warnings of disappointing numbers. A lower than expected

figure should spell further GBP losses.

UK inflation figures are also due for release this week. CPI is expected out at 2.1%,

comfortably close to the 2.0% target that the bank has set. This would give the MPC

the luxury and freedom to cut rates at the next meeting, should they wish, without the

worry of higher inflation.

Important releases from the other majors will be European HICP, their consumer

inflation index, and US CPI. US inflation is expected to ease slightly and this will fuel

speculation of a cut at this month’s FOMC policy meeting. The US Michigan consumer

sentiment and retail sales will also be significant.


Economic Research


0207 801 9084


Currency Rates Low High Current


GBPEUR 1.315 1.345 1.3157


Despite weaker than expected retail sales, investor confidence and consumer

confidence the Euro continued to strengthen against GBP last week. Thursday saw

both the ECB and the BoE rate announcements in which both held interest rates at 4%

and 5.5% respectively in line with expectation. Market participants do not anticipate an

interest rate cut until at least April and in light of current Sterling weakness there is

already talk of GBPEUR falling beneath 1.30.


GBPUSD “Cable” 1.9500 1.9820 1.9571


Higher than expected Economic optimism and wholesale inventories did little to stave

off talk of a recession in the US. Initial jobless claims coming in lower than expected did

little to encourage Fed Chairman Bernanke following pending home sales figures of –

2.6% vs. -0.7% expected. In particular, Mr Bernanke highlighted the impact the slowing

housing market, and specifically the sub-prime mortgage crisis, was having on the

wider economy. As well as underlining sub-prime problems, the Fed boss cited higher

oil prices, lower equity prices as factors that could further dent consumer spending.

This is likely to solidify expectations that the Fed will cut rates by 50 basis points at the

end of the month.


Commodity currencies


The commodity basket had a quiet week last week with very little data. The main

moves were downward, but this was largely due to sterling weakness than any specific

individual currency strength.


Low High Current


GBPAUD 2.188 2.2710 2.1833


Australian retail figures pushed to 0.8% in November. This was better than the market

had expected and represented the fastest growth rate in three years. This showed the

November rate hike had had little impact on consumer sentiment and sales were high

going into Christmas. The trade balance narrowed from the previous month’s record

high but exports are still lower due to the stronger Aussie dollar. This week consumer

confidence and labour data will be the main releases and the RBA Governor will speak

in London on economic prospects in 2008.


GBPNZD 2.4792 2.5810 2.4815


No data from New Zealand last week. Housing consents released late Friday showed a

moderation in the market as the RBNZ’s tightening begins to take effect. This week will

see consumer prices and retail sales figures.


GBPCAD 1.9675 2.000 1.9957


CAD was the only currency to buck the trend and fell versus the pound. The Bank of

Canada cut rates in December and is likely to follow suit as the Fed and Bank of

England continue to loosen policy. This will continue to mean lower levels against the

rest. However, GBPCAD should remain around 2.00 over the next week.


Low High Current


GBPZAR 13.17 13.67 13.22


The appointment of Jacob Zuma as the new leader of the ANC was taken in stride by

the market, and over the Christmas period had little effect. GBPZAR has slid due to

sterling weakness but rand has strengthened with interest rate hike expectations.

Inflation should have pushed above 8% this month and this should draw a 50 basis

point rise from the SARB at the end of the month.

Produced by Jabu Henson and Joe McKenna ( 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


Tues 15th Previous Expected

UK: 09.30 CPI (December) +0.3% (+2.1%) +0.5% (+2.1%)

RPI +0.4% (+4.3%) +0.6% (+4.0%)

GER: 10.00 ZEW Index (January) -37.2 -40.0

Current Conditions 63.5 60.0


US: 13.30 Empire State Index (January) 10.31 8.75

US: 13.30 PPI (December) +3.2% (+7.2%) +0.2%

Ex Food & Energy +0.4% (+2.0%) +0.2%


US: 13.30 Retail Sales / Ex Autos +1.2% / +1.8% +0.1% / +0.1%


US: 15.00 Business Inventories +0.1% +0.4%


Wed 16th

UK: 09.30 Average Earnings (+4.0%) (+3.9%)


UK: 09.30 Claimant Count Unemployment -11,100 / 2.5% -5,000 / 2.5%


E13: 10.00 Final HICP (December) +0.5% (+3.1%) +0.4% (+3.1%)

US: 13.30 CPI (December) +0.8% (+4.3%) +0.2% (+4.1%)

Ex Food & Energy +0.3% (+2.3%) +0.2% (+2.4%)


US: 13.30 Real Earnings (December) -0.4% -0.1%


US: 14.00 TICS Net Capital Inflows $114.0bn $65bn


US: 14.15 Capacity Utilisation (December) 81.5% 81.2%


US: 14.15 Industrial Production +0.3% -0.1%


US: 18.00 NAHB Housing Market Index 19 19


US: 19.00 Fed Beige Book Published


Thurs 17th Previous Expected

E15: 09.00 ECB Monthly Bulletin Published

US: 13.30 Housing Starts (December) 1.187m s.a.a.r. 1.15m

Permits 1.162m s.a.a.r. 1.14m


US: 13.30 Initial Jobless Claims 322,000 332,000


US: 15.00 Philly Fed Index (January) -1.6 -1.2


JPN: 23.50 Tertiary Industry Index +1.1% -0.4%


Fri 18th

UK: 09.30 Retail Sales (December) +0.4% (+4.4%) +0.2% (+3.3%)


US: 15.00 Leading Indicators (December) -0.4% -0.1%


US: 15.00 Michigan Sentiment 75.5 74.5



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.