Foreign Currency Report 29 March 2007

GBP
With the housing market weaker than expected, trade and GDP figures have sent the British pound tumbling against the US dollar today as prospects for another rate hike from the BoE diminishes even further.

The market had been looking for faster house price growth in the month of March, but not only did house prices grow by a slower pace (0.4 percent actual versus 0.7 percent expected), but growth in February was revised lower. GDP growth for the fourth quarter has also been revised from 0.8 to 0.7 percent.

Traders biggest disappointment came from the UK current account deficit, which has now hit a 16 year high. For the fourth quarter, the figure now sits at £12.7 billion. Currency strategists have said 'the account deficit is long term negative for Sterling'.

Analysts are suggesting that the Sterling is going to suffer in the short term, also hinting that the market could begin to talk about the possibility of a rate cut rather than a rate hike.

Inflation and housing data is due today with the CBI distributive trades survey. Analysts have been looking for an improvement, but given the recent trend of data, that could be difficult to achieve.

Nationwide chief economist Fionnuala Earley has said 'the housing market showed further signs of cooling during March' adding 'while the annual rate of house price inflation has yo-yoed over the last few months, the underlying trend is clearly softening as interest rate rises take effect'.

EUR
The European Central Bank have confirmed their recent concerns for inflationary pressure within the Eurozone. President Jean Claude Trichet has said that monetary growth is vigorous and interest rates are still on the accommodative side, leading markets to expect another rate hike in the short term

Comments from the ECB follow stronger economic data and higher oil prices. Whilst European consumer confidence was down for April, the slowdown in consumer price growth was less than expected while the growth for the Eurozone as a whole was particularly strong.

The market is looking to data due out today. This includes both German and French unemployment retail PMI.

Investors are looking for an improvement in the labour markets and deterioration in consumer spending. Recent Eurozone data suggests that the Value Added tax has only had a limited impact on the Eurozone economy.

With Germany now having to deal with a higher tax and higher oil prices, the sustainability of strong spending going forward is questionable. This may not be seen in the March data, but most likely reflected in April if oil prices continue their current trend.

USD
The US Dollar has strengthened against every major currency following Ben Bernanke's comments yesterday afternoon highlighting inflationary pressure.

The Federal Reserve currently finds itself in a very precarious position at the moment as they balance the deterioration in the housing market and the downturn in growth with the rise in oil prices. Over the past week, oil prices have jumped 15 percent in response to the growing tensions with Iran.

Rising oil prices will always ensure a close eye is kept on inflation. Mr Bernanke has said that 'core inflation remains uncomfortably high'. Despite the thought that core inflation could slow gradually over time, the Fed have are not taking away their inflation bias.

In response to the sub-prime housing situation, Mr Bernanke said that the central bank is watching the sector very carefully.

In summary, the market has taken the Federal Reserve Chairman comments as a clear sign he is not yet ready to lower US interest rates, even though the market has been looking for one.
Traders are now expecting the short term future rate decisions to be data dependent and judging from the recent trend of US data the Fed may not be able to hold onto their hawkish bias for long.

In the meantime, oil will continue to be the market's center focus. Should oil prices resume their climb, the chances of an August rate cut will become even slimmer.

It is essential to understand how timescales will affect your overseas budget so don't leave the financing of your project until the last minute.

All of our traders will be able to provide you with a valuable insight into the current market conditions. With major currencies becoming far more expensive to buy than in recent months, it would be extremely prudent to discuss the options in order to maximize your savings and protect yourself against any further adverse market movement.