Foreign Currency Exchange

We have seen Cable fall from a high last week of 1.6181 down to a low of 1.58 as a cut of 50-100 basis points in UK interest rates was factored in before the decision on Thursday. When the announcement was released we were surprised with a huge 150 basis point cut (from 4.5% down to 3.0%) which initially supported Sterling back towards 1.6 due to the positive effects it should have on the UK economy, but on Friday we saw it start to weaken off back to levels around 1.57. There will be hopes that this cut will help to stabilise conditions in the UK economy, and most importantly the housing sector, especially after we saw UK house prices fall further at the end of last week, and they now show a 13.7% drop in the last 12 months.

On the other side of the Atlantic we saw a raft of negative data out last week including larger than expected falls in factory orders and manufacturing figures. Most importantly we had US employment data out on Friday which was significantly weaker than expected with a 240,000 decline in non-farm payrolls for October, and unemployment rising further to 6.5% from 6.1%, the highest levels since 1994. This data will reinforce fears over the US economy and markets will continue to price in a further interest rate cut before the end of 2008.

With expectations of UK unemployment hitting 980,000 on Wednesday and a dovish inflation report from the BoE being released at the same time, underlying Sterling weakness will remain. However, with FED Governor Lockhart stating last week that “the US was suffering a severe market crisis and that interest rates could be cut to zero”, we expect to see a “tug-of-war” between the Pound and the Greenback as to which currency is the weakest and should see GBP/USD trading between 1.55 and 1.63 over the next week.