The pound was softer across the board yesterday as inflation expectations eased with PPI data.

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Tuesday 12/12/2006

• Softer PPI hurts sterling
• Federal Reserve expected to keep rates on hold today
• UK inflation data due at 0930 GMT
• US banks call sterling lower in 2007/8
• Key German data due this morning
• Oil continues to hold above $60

US Dollar:

A big day in the US today with the Federal Reserve due to announce that interest rates are to be left at
5.25% for the fourth consecutive month whilst the US international trade balance is expected to narrow
to $63.0bn.
Analysts will be looking for any change in the language in the Fed’s accompanying statement that may
point to a rate cut in 2007. Futures markets have a 26% chance of a rate cut in the March contract but
a rate cut is fully expected by June 28th.

Pound:

The pound was softer across the board yesterday as inflation expectations eased with PPI data. Today
we have CPI data out at 0930 GMT which will be closely looked at by markets. Yesterday MPC member
Paul Tucker explained that the November rate hike was to head off inflation caused by the upcoming
pay round, making today’s inflation data that much more prescient.
Both Goldman Sachs and Lehman Brothers are calling sterling lower versus the dollar in 2007/8.

Euro:

The Euro continued to gain support with comments from ECB members again stressing that rates are
still fundamentally low and the last move was to contain inflation.
Today at 1000GMT the Germans release their closely watched ZEW data with conditions expected to
edge up to +55.5 from +53.0 in November.

General News:

• Last night former Fed chairman Alan Greenspan commented overnight that he expected a
‘sustained period of weakness’ in the greenback.
• Another strong close on Wall St fuelled by M&A activity helped the Nikkei and FTSE open high
again this morning.
• Oil fell by over a dollar yesterday as mild weather continued in the US. Support is still to be
found above $60 as OPEC lines up the market for production cuts. Current oil price is $61.37.

Inter-bank
Updated 12/12/2006

GB POUNDS /US DOLLAR 1.9592
GB POUND / EURO 1.4800
EUR/USD 1.3233
GBP/JPY 228.87
GBP/AUD 2.4909
GBP/NZD 2.8429
GBP/ZAR 13.7672
GBP/CHF 2.3542
GBP/CAD 2.2445
GBP/SGD 3.0173
GBP/THB 69.149
GBP/HKD 15.2265

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