Euro Pounds Brief Friday 12 December 2007

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Friday 12/01/2007

• BoE shock markets and raise rates to 5.25%
• Inflation, house prices and debt market cited
• The pound flies on the back of rate move
• ECB keep rates on hold; no clear signals for next move
• Quiet day in the US as bond selling dominates
• Oil on lows; OPEC concerned over 15% slide this year

US Dollar:

A relatively quiet day in the dollar yesterday. Government bonds sold off on the back of the UK rate
move. With a less hawkish Trichet the euro-dollar cross broke below 1.29 in overnight trade. This afternoon
we have US import/export prices.

Pound:

The Bank of England shocked markets yesterday and raised rates to 5.25%, the highest rate in six
years. Comments released with the move highlighted that the MPC are concerned about inflation, a
spiralling debt market and a soaring housing market which will be made worse by the upcoming January
pay round.
Governor Mervyn King will have seen the inflation data for December which will be made public next
week and this has prompted speculation that inflation will exceed 3.0%. At 3.1% King will have to write
to the Chancellor and explain the overshoot. Markets have taken this move as a pre-emptive strike by
the Bank to head of inflation caused by the January pay round. With many people heavily leveraged in
the mortgage market the fallout from this move could be worrying.

Euro:

The ECB elected to keep rates on hold yesterday, not helping the euro after heavy losses against the
pound. The press conference held following the release was far less hawkish than expected with no
mention of Trichet’s hike keyword ‘vigilance’. The lack of any hints saw the euro slip further against a
strong pound and continue to come under pressure against the greenback with a low of 1.2877.

General News:

• The saga of Japanese rate hikes continues with more positive data. Investors are still undecided
as to the timing of the hike; the BoJ may decide to follow the lead of the BoE.
• The People’s Bank of China (PBOC) are rumoured to be raising interest rates today. China still
continues to suffer from a huge trade surplus with massive exports and very little inflow.
• UK stock markets continue to underperform with investor fears following the rate hike and oil
heavyweights (BP and Shell) suffering from falling oil prices.
• Oil dropped to below $52 on Thursday, a 15% drop in the year. OPEC are considering action
which will see production cuts in an effort to stabilise prices. Current trade is $52.72.

Interbank
Updated 12th January
GB POUNDS /US DOLLAR 1.9457
GB POUND / EURO 1.5084
EUR/USD 1.2903
GBP/JPY 234.25
GBP/AUD 2.4927
GBP/NZD 2.8163
GBP/ZAR 14.1118
GBP/CHF 2.4316
GBP/CAD 2.2911
GBP/SGD 3.0068
GBP/THB 69.872
GBP/HKD 15.1732