Foreign Currency Report 12 February 2007

GBP
Sterling held steady against the Dollar and Euro today as the market awaits British producer price inflation data for fresh impetus on the short-term outlook for Bank of England interest rates.

This week's key event is the Bank of England's quarterly inflation report on Wednesday, which will give pointers to where the Monetary Policy Committee stands on rates after a surprise pound-boosting hike to 5.25 percent in January and a steady decision this month.

The January producer price index, due this morning, will be followed by the consumer price index on Tuesday, giving investors a rounded picture on inflation trends.

"Upside in producer prices will be bullish for sterling, but any impact will be short lived. More important will be CPI tomorrow. If we see acceleration beyond 3 percent it will trigger the BoE having to explain why inflation is so high and that would be bullish for sterling,"currency strategists have said.

Core British PPI is expected to rise 0.2 percent on the month in January, giving an annual rise of 2.4 percent.

Analysts also saw additional support for the pound from renewed carry trades -- where low-yielding currencies are used to fund purchases of higher return assets.

USD
Oil ended Friday trading just below $60 a barrel, with the closure of a US oilfield after a fire and the ongoing cold snap there bolstering prices.

The cost of a barrel of US light crude rose as high as $60.42, before slipping back to end up 18 cents to $59.89, while Brent fell 2 cents to $59.01.

Prices have not settled above $60 since the start of the year and fell below $50 last month as demand for oil eased.

Meanwhile, Opec members - led by Saudi Arabia - cut output in recent weeks.

The move was designed to stabilise prices after they fell steadily from a high of more than $78 a barrel in August.

With the projected fall in Opec supplies in the short term, the market is seen to be gaining momentum.

A fire which shut an oilfield in California, which produces 120,000 barrels a day, has raised fresh supply concerns. The incident led to independent producer Occidental Petroleum shutting down 95% of production at the site in Elk Hills. Fresh violence in Nigeria also contributed to the recent rise in prices.

The kidnapping of a French national in the oil-rich Niger delta was the 40th such incident in the past month.

Other factors driving the market were a cold spell in the US, which is expected to last for another week, increasing the demand for heating oil.

UK Economy
It has been reported that economic growth in the UK may drop lower than 2% should the Bank of England continue to raise interest rates.
The news follows Bank policymakers shock rise in rates to 5.25% from 5% in January, in a bid to curb inflation.

Although the Bank avoided a second quarter point rise last week, currency analysts are expecting a further increase.

The BCC said it still forecast that overall UK gross domestic product would be 2.6% in the current year.

But it said growth could slow to 1.9% in the first three months of 2008 if interest rates reach 5.5%, with overall growth next year slipping to 2.1%.

"We acknowledge that inflation is a serious problem, and we accept that the Monetary Policy Committee (MPC) may have to take further action," said BCC economic adviser David Kern.

"But monetary policy cannot affect the economy instantaneously. The MPC must allow time for the measures taken already to work, before raising rates further.'