Foreign Currency Exchange

A data heavy week in the UK only stood to further highlight the difficult situation that the Bank of England is currently facing. CPI (Consumer Price Index) pushed higher to 4.7%; well above the BoE’s 2% target, and unemployment rose by 32,500 to 904,900 total and a TUC spokesman said this could rise to 2million in 2009. This rise in jobless claims means the unemployment rate is now at 5.5%, the highest since early 1999. We also saw the minutes of September’s BoE interest rate decision which showed an 8-1 vote in favour of a hold. The one member who voted for a cut was David Blanchflower who voted for a 50 basis point reduction instead of the 25bps that he opted for last month. This split also shows a slight Dovish shift in attitudes as Tim Besley has now voted to hold after he was the only one of the nine member committee who voted for a hike in interest rates last time around.

News in the UK was mainly dominated by the merger between two of Britain’s largest banks where Lloyds TSB will take over HBOS in a £12.2billion deal. Even though this merger may mean thousands of job losses the shares in the two companies went up 17.7% and 17% respectively after the deal was announced on Thursday.

This week Nationwide house price figures released on Thursday will be watched after the lender said that the housing slump could mean a total 25% drop in house prices before the market starts to recover again. In Europe however we could see the ECB’s job of juggling high inflation with slowing growth getting slightly easier as German CPI, the headline inflation figure, is expected to drop below 3% but still remain above target. Also out this week is the German IFO on Tuesday which is a business sentiment survey and a good health indicator for the Eurozone as a whole as Germany makes up a quarter of the 15 member states’ total GDP. The survey is expected to show a negative sentiment towards the current situation but a rise in expectations for the next 6 months. With this in mind the ECB may be in a better situation to look at cutting interest rates than the BoE.

Even with the injection of $180 billion by the world’s major central banks to help ease liquidity, we are still expecting to see a cut in both UK and European interest rates towards the end of the year or early in 2009 as both economies look equally bleak. We therefore expect the GBP/EUR cross to remain range bound between 1.2 and 1.2650 for the time being as these cuts are priced into the market, and don’t think we will see any sort of recovery until some time in 2009, if at all.