British Pound

The British Pound has been reeling since the Bank of England cut rates at the beginning of this month, from 5.75% to 5.50%.  Last week, the minutes for the meeting were released.  They revealed that that members of the Bank were growing increasingly nervous about the state of the British economy and are worrying particularly about how fallout from the credit crunch will impact growth.  British interest rates are still among the highest in the industrialized world, behind only Australia and New Zealand.  Thus, it seems investors are punishing the Pound indirectly for the rate cuts, because of fears concerning the near-term prognosis for the British economy.  At the same time, the minutes indicated that members of the Bank were adamant about not lowering rates further, so some of the concerns may be overblown.

Read More:  Pound weakens after BoE minutes show concerns for growth

Original post by Jimmy Atkinson and software by Elliott Back

The European Central Bank (ECB) will likely maintain its benchmark interest rate at 4.00% at its meeting his week.  The Bank of England is also expected to hold its lending rate in place, at 5.75%.  While these two moves should be seen by Dollar bulls as acts of clemency, they are more akin to a stay of execution than to a commutation of its death sentence.  The reasoning is that it is inevitable that the US-EU interest rate difference will be bridged over the next few months, as the Fed continues to lower rates while the ECB is in the process of hiking them.  The only question is when.  Accordingly, analysts will be paying close attention to the language employed by the heads of the various Central Banks at their next meetings to get a sense of timing.

Read More: Dollar hovers above lows

Original post by Jimmy Atkinson and software by Elliott Back

The UK Pound has been on a tear recently, both against the
USD and more surprisingly, against the Euro.  The currency has been given a boost by the
Bank of England’s reluctance to cut its benchmark interest rate, which at
5.75%, remains the highest among the world’s major currencies.  However, many economists feel the case for a
rate cut is growing stronger every month, whether or not the Bank of England is
willing to acknowledge it.  Inflation is
only moderately high, while the fall in housing prices-exacerbated by a prolonged
period of tight money-threatens to drag down the entire economy.  The markets are still pricing in a rate cut by
year-end, which would surely drag down the Pound should it obtain.  Dow Jones Newswires reports:

“We strongly suspect that market pessimism in this respect
will continue to grow, in reverse proportions to its expectations of a further
hike in U.K. interest rates,” said…a senior currency strategist.

Read More: Sterling’s Strength Can’t Last Much Longer

Original post by Jimmy Atkinson and software by Elliott Back

The Central Bank of the UK will likely lower interest rates at its next meeting, following the lead of the Fed. The most recent British economic data indicated that inflation has fallen to its lowest level in over a year.  Moreover, UK (and European for that matter) monetary policy prioritizes price stability over employment, by unofficially targeting an inflation benchmark.  Thus, without regard to economic growth, the Bank of UK will adjust interest rates accordingly.  While the Pound-Dollar exchange rate is less sensitive to relative interest rates, the Pound has already fallen against the Euro, since the two countries compete over foreign capital.  Bloomberg News reports:

"The move down is probably going to continue. Sterling will remain under pressure. If any major central bank is going to emulate the Fed and cut rates, it’s going to be the BOE.” 

Read More: U.K. Pound Falls for Third Week Against Euro on Rate Cut Views

Original post by Jimmy Atkinson and software by Elliott Back

Although the British pound suffered earlier in the week from a large Bank of England loan, the currency has been lifted due to a survey taken by UK manufacturers. The results of the survey, which inquired about their order books, showed that manufacturers were more successful this month than they’ve been in over a decade. Analysts did not expect such a promising report, as it proved that the UK is handling global credit problems better than most countries. According to Forbes:

The Confederation of British Industry revealed that a balance of +9 pct
of firms polled reported that their order books were above normal in
August - the highest level for more than 12 years.

Read more: Pound boosted by buoyant UK manufacturing survey

Original post by Amy Cottrell and software by Elliott Back

Although it is not known whether the Bank of England loaned £314 million to one borrower or many yesterday, the effects were still the same. A one-day loan of such magnitude weakened the domestic currency, if only temporarily. As experts point out, this isn’t entirely unusual and the economy has survived much larger Bank of England loans. Reports Forbes:

Significantly more than 314 mln stg this [sic] has been borrowed in one day
in the recent past — for example nearly 4 bln stg on June 29 and 2 bln
on July 2, he [George Buckley] added.

Read more: Pounds weakens as BoE confirms 314 mln stg use of its credit facility

Original post by Amy Cottrell and software by Elliott Back

The Bank of England raised interest rates for the second
time in as many months yesterday, to 5.75%. As a result, the UK has widened its lead over the US as the country with the highest interest rates in the industrialized world,
after New Zealand. Moreover,  the UK is becoming an increasingly viable alternative to the US as a target for risk-averse investors. The
British Pound is hovering around a record high against the USD, which can
probably expect to suffer prolonged decline against the world’s majors if it
falls behind in attracting risk-free foreign capital. The Financial Times reports:

“The statement accompanying the rate hike gives few firm
clues as to future interest rate movements, with the Bank of England…concluding
that the risks to the inflation outlook are still tilted to the upside.”

Read More: BoE rate decision boosts pound

Original post by Jimmy Atkinson and software by Elliott Back

As we wrote last week, the direction of the Dollar may be influenced more by external economic events rather than by internal activity.  Accordingly, it would behoove forex traders to direct their attention away from the Fed and towards the Bank of England and the European Central Bank, both of which face important monetary policy decisions later in the month. With regard to the Bank of England, futures markets have priced in a 2/3 chance that rates will be cut by 25 basis points. In the case of the ECB, the markets are expecting rates to be maintained at current levels. However, analysts will be scrutinizing the Banks’ respective press releases and monitoring other developments in this area due to the implications for the US-EU-Britain interest rate differential.  Reuters reports:

Some analysts think that hawkish comments from Trichet will
be brushed aside with weaker economic data leading to the
prospect of falling euro zone rates later in the year.

Read More: Pound down, others flat before ECB, BoE decisions

Original post by Jimmy Atkinson and software by Elliott Back

The anecdotal evidence for surging retail interest in forex is cropping up everywhere. Moreover, investors are no longer even limiting themselves to the spot market, utilizing derivatives to speculate on future exchange rates. In the UK, for example, 10% of investors intending to purchase real estate in the EU are utilizing forward agreements to hedge their exposure to the Euro, which has risen 10% against the Pound since the beginning of 2008. Evidently, prospective home buyers are hoping that the Euro returns to 2007 levels, which would significantly lower the cost of buying property there. However, if the Euro continues to appreciate, such investors could end up losing more than they bargained for. Homes Worldwide reports:

Even the movement in the markets over a couple of days can make the
difference between owning a property and no longer being able to afford
it.

Read More: Brits Gambling On Volatile Currency Markets

Original post by Jimmy Atkinson and software by Elliott Back

The US Federal Reserve Bank is known for ambiguity and vagueness. The Bank of England, it appears, is not trying to emulate this approach. The Bank put an end to speculation about its near-term monetary policy by announcing that it does not plan to cut interest rates for at least two years. Apparently, inflation has breached the Bank’s 2% target, and its internal models are forecasting that it won’t be until 2010 that price inflation returns to a more palatable rate. This is bad news for the British economy, which is in the throes of an economic downturn precipitated by the housing crisis and would surely benefit from a loosening of monetary policy. By extension, the British Pound should also suffer a "correction," as a combination of inflation and lack of suitable investment opportunities will send investors rushing for the exits. The Financial Times reports:

Mr King contrasted his position – and its focus on controlling
inflation – with that of Ben Bernanke of the US Federal Reserve. “We
did not fall prey to the sirens to cut interest rates further as some
other central banks have done,’’ he said.

Read More: No interest rate cut for two years, Bank warns

Original post by Jimmy Atkinson and software by Elliott Back

When one hears the phrase "housing crisis" uttered, the US immediately comes to mind. Not without reason, of course, since the US housing market is the largest in the world, and the scope of any US housing crisis is sure to dwarf a comparable crisis in any other country, in absolute terms. At the same time, let’s not forget that prices in the UK, for example, began to decline earlier than in the US. In addition, as one columnist points out, the impact of the UK housing crisis may be relatively greater on the UK economy. While some of the statistics he quotes are dubious, housing and consumer debt (on a per capita basis)  may in fact be larger in the UK than in the US. As a result, the ongoing correction in housing prices would be expected to punish the UK more than the US. The story could be the same for the Pound, vis-a-vis the US Dollar. Money & Markets reports:

[One analyst] is…a long-term bear on the British pound and believes any
rallies in the currency represent an opportunity to enter short at a
better price. Selling the pound against the dollar with a 10-12 month
time frame may present one of the best opportunities in the currency
markets today.

Read More: UK Housing Bust Spells Trouble for Pound

Original post by Jimmy Atkinson and software by Elliott Back