Foreign Currency Report 8 August 2008

GBP

The Bank of England has kept interest rates on hold at 5% yesterday as it struggles to deal with a slowing economy and spiralling inflation.

Many reports have shown the economy heading for a significant slowdown or even a recession, (a decline in GDP for two or more consecutive quarters) but the Monetary Policy Committee's primary goal is to keep inflation at 2% and it currently stands at 3.8%.

Although the bulk of members voted to hold rates last month, one supported a cut, while another backed an increase.Some analysts had forecast rates would rise this month to tackle inflation, while evidence points to annual consumer price inflation rising above 4% when July's figure is published next week, some economists feel inflation could top 5% before the end of the year, as energy firms raise their prices resulting in a interest rates rise in order to combat this. The International Monetary Fund (IMF) has cut its forecast for UK economic growth over the next two years as it has predicted the UK economy would grow by 1.4% in 2008 and 1.1% in 2009, down from the 1.8% for 2008 and 1.7% for 2009 that it predicted in July. It said inflation at 3.8% was higher than expected, and inflation expectations were rising even as economic activity was slowing. The Consumer Confidence Index, which fell by 11 points to 51 in July, the biggest drop since the index started in 2004, The Nationwide said gloomy economic data, falls in house prices, job losses and more increases in the cost of living contributed to the fall. With constant poor economic data continuing to weaken Sterling, sooner rather than later would be beneficial to secure your currency in advance of a requirement. Forward contracts are the way of guaranteeing a currency exchange rate for you for up to two years in advance.

EUR

The European Central Bank (ECB) has kept interest rates unchanged yesterday at 4.25% amid signs of slowing economic growth, as expected, but the Euro has pulled back sharply as ECB President Jean-Claude Trichet appears to be turning his focus toward the downside risks to growth. As a result, traders are starting to consider the potential for a rate cut by the central bank within the next year.

Mr. Trichet went on to say that this slowdown reflected global growth conditions, thanks to high oil prices. Meanwhile, the ECB remains particularly hawkish on inflation, saying that CPI would remain above 2 percent for "some time" and that the recent data supported the latest rate hike in July. Since price stability is the ECB's primary mandate, the central bank will have limited ability to completely brush off the inflation data on hand in order to make monetary policy more accommodative. Final data in a key monthly survey of private sector companies showed that of the big four economies in the Euro currency zone, only in Germany did services activity expand, and more quickly than in June. The RBS/Markit Euro zone Purchasing Managers Index for services companies, which range from banks to cafes, fell to 48.3 in July from 49.1, unrevised from the flash estimate and well below the 50.0 mark that separates growth from contraction. The French services PMI plummeted to 47.5, its lowest since the survey began in 1998, while Italy slipped into further contraction to a survey low of 45.6. Spain had a small rebound but remained well below the 50.0 level at 37.1. As usual Germany fared a little better and remained in growth territory at 53.1, ticking up from June's 52.1. As a result, the central bank is now expected to hold interest rates steady at 4.25 percent well into 2009, despite the slowdown, as it battles to bring inflation back under its 2 percent target.

USD

The US Dollar exchange rate eased back from a seven week high against the Euro and the Pound on yesterday as traders booked profits after the greenback's recent strong run.

The Dollar, which also traded up to a seven-year peak against the yen on Wednesday, has rallied across the board over the past week on falling oil prices and a realisation that the economic turmoil which begun from the US, was spreading across the globe.

More people in the US have signed contracts to purchase previously owned homes in June, a sign that lower prices are drawing some buyers back into the market. The index of pending home sales rose 5.3 percent after a revised 4.9 percent decline in May, NAR (The National Association of Realtors) said yesterday in Washington. The gain is the third this year, but a separate report from the Labour Department showed initial jobless claims for the week ended Aug. 2 unexpectedly rose to the highest level in six years, signalling the labour market is continuing to weaken. Initial jobless claims increased by 7,000 to 455,000, the most since March 2002. Nonfarm payrolls fell for a seventh-straight month in July, the government said Friday, pushing the jobless rate to a four-year high of 5.7%. Barring an unexpected reversal in weekly claims and economic conditions as a whole, payrolls will probably fall again this month.

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