Foreign Currency Report –19th November 2007

GBP

The British pound extended its losses at the end of last week following weak retail sales numbers supporting the Bank of England's earlier statement on the likelihood of interest rate cuts to come.

Consumer spending dropped for the first time in six months during the month of October because of weaker food and clothing sales. Overall, the report highlights the Bank of England's concerns that downside risks for growth loom large, especially after the central bank aggressively raised interest rates this year and as oil continues to trade near record highs.

Furthermore, with the Bank of England's inflation report suggesting that price pressures would rise in coming months, signs of an economic slowdown will only help build the case for a rate cut in Q1 2008.

The Bank of England is notorious for shifting their monetary policy bias on a dime should data warrant it, making a first quarter rate cut a realistic possibility.
This would support the case for anyone with a need for currency in the new year securing prices ahead of further declines.

USD

The dollar could get some short-term respite this week as sterling becomes the target of bearish investor sentiment after the Bank of England signaled weaker growth and set the tone for interest rate cuts next year.

Consumer price growth was right in line with expectations but the fact that it did not surprise to the upside was disappointing for Dollar supporters. Manufacturing data were stronger than expected, but this natural stimulus of dollar weakness has already been priced into the market.

Jobless claims continue to drive speculation that we could soon see a turn in the labour market. Troubles continue to plague the financial sector and US retailers are cautioning against a difficult holiday season due to higher food and energy costs and higher mortgage payments. The dollar is stronger today but that is primarily due to a sharp fall in commodity prices.

A rate cut by the Federal Reserve next month is still up in the air because the risks to growth are just as significant as the risks to inflation. Traders are expecting industrial production and the Treasury International Capital flow report on Friday; improvements are expected for both numbers.

EUR

The Euro is losing momentum and is reacting sluggishly to strong economic data and hawkish ECB comments suggesting that the Euro is becoming overbought. In order for fresh gains to be achieved traders will need to either see a big downward surprise in US data or a big upward surprise in European data.

Eurozone trade and current account balances are the only pieces of data on the calendar this week. With Consumer prices coming right in line with expectations, the 2.6 percent annualized pace of growth explains why the ECB remains extremely hawkish and refuses to talk down the Euro.

French traders are now convinced that the region needs a stronger currency, The Bank of France said this morning that "inflation vigilance is warranted and the recent rise in the euro is helping to limit the rise in certain prices."

According to the ECB monthly report, the central bank "stands ready to counter upside risks to price stability as required by our mandate."