Foreign Currency Report 29 July 2008

Background

The global credit crunch shows no signs of abating, according to the International Monetary Fund (IMF). In its latest global financial stability report, the IMF says that falling house prices and slowing economic growth are hitting credit. It warns that banks are under renewed stress, and further cutbacks in bank lending could deepen the slowdown. The IMF's latest reports suggests that the slowdown will be more prolonged into 2009 than previously thought, especially if emerging market country growth slows down. Also, the IMF has again warned that the "policy trade-offs between inflation, growth and financial stability are becoming increasingly difficult."

Such problems are evident in the three-way split among members of the Bank of England's monetary policy committee over the future direction of interest rates, as well as in the decision of the European Central Bank to raise rates this month.

GBP

The economy grew at its weakest pace in three years in the second quarter of this year, official data showed on Friday, but few analysts are betting interest rates will fall any time soon. The risk of the first recession since the early 1990s is growing but living costs are also surging, making it hard for Bank of England to cut rates and stoking public dissatisfaction with the Labour government's handling of the economy. Rates are expected to fall eventually but that may come too late to offer any economic relief to Prime Minister Gordon Brown, who looks on course to lose the next election after Labour lost one of its safest parliamentary seats on Friday. "The credit crunch, coupled with falling house prices, and rising food and energy costs are continuing to constrain activity, yet fiscal and monetary policy can do nothing to ease the pain," said James Knightley, an economist at ING. The Office for National Statistics said GDP rose by 0.2 percent in the three months to June, bringing the annual rate down to 1.6 percent from 2.3 percent in the first quarter. The slowdown was driven by the biggest drop in construction since mid-2005 and the result of sharp declines in house building as a decade-long housing boom swiftly reverses into a slump.

EUR/USD

The 15-nation Euro currency rose Monday against the US dollar despite a report showing consumer confidence falling to a more-than five-year low in Germany, Europe's largest economy. The closely watched GfK consumer climate index on Monday showed confidence slipping in Germany to a more-than five-year low as higher energy prices, growing fears of a recession and concern about the global economy needled German shoppers. The forward-looking index dropped to 2.1 points for August from a revised 3.6 points in July and its lowest level since June 2003. The U.S. government announced after market close on Friday that two more mortgage lenders were to be shut down, with investors fearing there may be more to come. 'Mild U.S. jitters have kept the US Dollar exchange rate under pressure and U.S. stock futures have weakened in the morning to add support to the Euro against the U.S. currency, ' said Matthew Foster-Smith at Thomson IFR Markets.

However with no major data due until later in the week, trade in the major currency pairs remains within the recent ranges, with analysts seeing little chance of any breakthrough until markets have more information to get their teeth into. 'The calendar of data releases becomes very interesting later this week especially with the U.S. GDP, non-farm payrolls and the ISM index until then, the market might prefer to stay in a wait-and-see mode,' said Ulrich Leuchtmann at Commerzbank.

As can be seen from the above most currencies are coming under pressure in one form or another with spiraling inflation and slow growth. For the majority of you a house purchase can become a stressful time weighing up budgets and protocol. Don't let currency exchange become another stress on your list,to discuss any of the services and foreign currency exchange contracts we can offer or how we can tailor our approach to meet your requirements, please feel free to call me James Croft on +44 (0) 20 7989 0000 or email jrc@fcexchange.co.uk