The minutes of the Bank of England Monetary Policy Committee meeting were

released last week and the voting went as expected. Despite the 7-2 split to leave

rates on hold, being inline with market forecast, the pound slipped on the news

against all but the dollar. This indicates a generally bearish outlook for sterling and a

closer look at some of the main topics of discussion in the MPC meeting may provide

some insight into this reasoning.

Overall the indicators pointed to slowing in GDP growth in the fourth quarter and Q1

next year. There were signs in the August inflation report that growth had already

begun to slow prior to the financial market turmoil. This would be consistent with the

interest rate tightening employed to keep inflation in check. However, this is expected

to be accelerated by the recent upheaval.

An inspection of credit conditions revealed that the squeeze is finding its way through

to UK households. It was previously believed that the credit crunch would have a

limited impact, but mortgage rates are already reflecting the financial environment.

“Quoted two-year fixed rates are up five basis points since July, whereas they would

have fallen by around 30 basis points had they moved in line with their usual

relationship with interest rate swaps.” House price data has been mixed, but recent

figures certainly show a slow down.

The trouble, as mentioned in last week’s update, is that inflationary conditions

abound. Energy costs are up, oil prices are very high and the cost of food continues

to increase.

So what does this mean? Well, the fixed income market has been pricing in interest

rate cuts for relatively soon and sterling fell rapidly as markets attempted to price in

the dovish outlook forecast by the November inflation report. However, this may be

too much too soon. The Bank of England chief economist Charlie Bean, in an

interview with the Liverpool Daily Post, suggested he was unlikely to vote for a

December rate cut. He emphasised the continued upside inflationary risks and

warned that the financial market uncertainty will remain for some months to come.

Therefore in our view, it is likely that fundamentals will require some loosening of the

economy over the next year and this would mean future sterling weakness. However,

during the festive period, markets are prone to volatility caused by the reduced

liquidity, and this could see a small short-term jump back for the pound especially if

the anticipated rate cuts do not materialise.

The week ahead

The focus in the UK will be on housing data. This could halt sterling’s meagre

recovery if the data follows the soft tone of late.

Markets will be watching US data closely as we approach the Fed’s December

interest rate meeting. The majority are looking for the FOMC to cut rates again

and we see further dollar weakness is the data is below expectation.

In the EU, flash HICP will give a glimpse of Eurozone inflation levels in

November. This is accompanied by German Ifo and Q3 Revised E13 GDP.

These should indicate the pace of activity in the Europe and might provide a

respite from the recent EUR strength.

Economic Research

0207 801 9084

Currency Rates Low High Current

GBPEUR 1.3856 1.4032 1.3957

Euro continued to strengthen against dollar and sterling last week while suffering

against low yield G7 currencies. Records were once again broken as EURUSD came

within touching distance of 1.50 and GBPEUR made lows not seen for nearly 5

years. There is a lot of concern on the continent about the strength of the single

currency; both Chancellor Merkel and Euro-Group Chair Juncker have expressed

that it was no longer possible to have a ‘benign approach’ and Jean-Claude Trichet,

Head of the ECB, stated he was against ‘rapid and brutal currency moves’; he would

not however classify euro’s movement as ‘brutal’. Denmark also decided on another

referendum on whether to take up the single currency; this had a negligible impact.

GBPUSD “Cable” 2.0449 2.0762 2.0690

On a trade weighted basis the dollar has weakened to levels not seen since the

Second World War on the back of fears of a recession in the world’s largest

economy. A rate cut by Ben Bernanke’s Fed has been priced in so as to support the

greenback although fears of central bank reserve diversification will hamper efforts of

a dollar rebound. The minutes for the Fed’s October meeting were released stating

that it was a ‘close call’ on the decision to cut however they cut growth targets to

1.8% to 2.5% which only reinforced concerns over the economy.

Commodity currencies

A general unwinding of the carry trade, following dips on global equities markets hurt

commodity currencies last week

Low High Current

GBPAUD 2.2832 2.3830 2.3586

Following a general line of carry trade weakness, Aussie suffered last week. Further

falls in the price of industrial commodities didn’t help although gold prices remained

firm. There were no significant domestic economic developments during the week to

influence markets. The currency was unsettled slightly by uncertainty ahead of the

general election and an uncertain result.

GBPNZD 2.6875 2.7578 2.7301

With no substantive data released last week, NZD was once again at the behest of

the carry trade. Subsequently due to risk aversion, Kiwi weakened as funds were

repatriated to Japan. Speculators will be looking towards Wednesday morning’s

Building Permits figures and Thursday’s Money Supply and Business Confidence

measures to see whether the RBNZ’s policy of hawkishness has stymied the


GBPCAD 1.9867 2.0513 2.0513

CAD has been once again brought closer to parity over the past week due to liquidity

fears and carry trade worries. Falls in metals prices were offset somewhat by the

continuing high price of oil. Growth figures also fell below 2.0% for the first time since

the ‘credit crunch’ began as consumer prices fell 0.3% and core prices, excluding

food and energy, fell 0.2%.

Low High Current

GBPZAR 13.6726 14.50 14.47

With no domestic data last week, ZAR was biding its time ahead of a very important

week of data. Up for release this week include Q3 GDP figures which are widely

forecast to fall, strengthening the calls for interest rate cuts in the short term.

Consumer prices are due on Wednesday and with beliefs that a figure above 7.0%

the MPC will have to remain hawkish.


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


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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 27th

FRA: 07.45 Business Climate (November) 108 107

ITL: 08.30 Business Confidence (November) 92.9 92.1

GER: 09.00 Ifo Index (November) 103.9 103.4

– Current Conditions / Expectations 109.6 / 98.6 109.1 / 97.8

US: 14.00 Case Shiller House Prices (September) -0.7% (-4.4%)

US: 15.00 Consumer Confidence (November) 95.6 91.6

Wed 28th

POL: Rate Announcement 4.75% 5.0%

GER: 07.00 GFK Consumer Confidence 4.9 4.3

EU-13: 09.00 M3 / 3 Month Moving Average (+11.3%) / (+11.5%) (+11.4%)/(+11.4%)

US: 13.30 Durable Goods (October) -1.7% +0.0%

US: 15.00 Existing Home Sales (October) 5.04m s.a.a.r. / -8.0% 5.0m

US: 19.00 Fed Beige Book

JPN: 23.50 Industrial Production (October) -1.4% +1.7%

Thurs 29th

CZE CNB Rate Announcement 3.25% 3.25%

UK: 07.00 Nationwide House Prices (November) +1.1% (+9.7%)

FRA: 07.45 Consumer Confidence (November) -22 -24

SP: 08.00 Flash HICP (November) (+3.6%) (+3.9%)

GER: 09.00 Unemployment (November) -40,000 / 8.7% -30,000 / 8.6%

ITL: 09.00 PPI (October) +0.5% (+3.5%) +0.4% (+3.6%)

UK: 09.30 Mortgage Applications (October) 102,000 97,000

UK: 11.00 CBI Distributive Trades Balance 10 8

US: 13.30 GDP (Q3 Revised) +3.9% s.a.a.r. (p) +4.8%

– Deflator +0.7% +0.8%

US: 13.30 Initial Jobless Claims (w/e 24th 330,000 332,000

US: 15.00 New Home Sales (October) 0.77m s.a.a.r. / 4.8% 0.75m

JPN: 23.30 Core CPI – National (Oct) / Tokyo (Nov) (-0.1%) / (0.0%) (+0.0%) / (+0.1%)

JPN: 23.30 Unemployment / Job:Applicants 4.0% / 1.05 4.0% / 1.05

Fri 30th

EU-13: 10.00 EC Business Climate (November) 0.87 0.78

EU-13: 10.00 EC Economic Sentiment (November) 105.9 105.0

– Consumer / Industrial Sentiment -6 / 2 -7 / 1

EU-13: 10.00 GDP (Q3 Revised) +0.7% (+2.6%) (p) +0.7% (+2.6%)

EU-13: 10.00 HICP Flash (November) (+2.6%) (+2.7%)

ITL: 10.00 Prelim CPI (November) +0.3% (+2.1%) +0.3% (+2.3%)

UK: 10.30 Gfk Consumer Confidence (November) -8 -9

US: 13.30 Personal Income / Consumption (October) +0.4% / +0.3% +0.4% / +0.3%

US: 14.45 Chicago PMI (November) 49.7 50.3

US: 15.00 Construction Spending (October) 0.3% -0.2%


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


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.