Euro Pounds Brief Tuesday 20/02/2007

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Tuesday 20/02/2007

• Sterling under pressure following BoE FX comments
• Fed warned against using inflation as target for rate decisions
• Yen weakens ahead of BoJ decision as bets on hike ease
• Trichet repeats warnings on inflation outlook
• German Finance Ministry raises growth forecasts
• Oil holds ground on supply issues and continued Iranian speculation

US Dollar:

A quiet day in the dollar market with no action from the US or Asia with both time zones celebrating President’s
Day and the Lunar New Year respectively. The dollar came under further pressure from the euro edging
towards the 1.32 level as the Fed is warned against using inflation as the target for interest rate decisions,
but to focus on the other side of the coin, employment. These comments come from the Financial Services
Committee from the Democrats. No data is due in the US market today so another benign day should be in
store with traders settling back down at their desks after the long weekend.

Pound:

Sterling came under renewed pressure in trade yesterday as the BoE released comments relating to the foreign
exchange market specifically. The BoE noted in a letter to the Treasury Select Committee that ‘some
depreciation of the real effective exchange rate will probably be necessary’ in order to close the current account
deficit. Additionally the BoE warned that strong money supply (data due at 0930) may increase inflation
expectations while household debt build up may complicate monetary policy. Cable dropped almost a full cent
following these comments with the pound falling 50 pips against the euro.
The Times reports today that banks are about to write off more than £6.6bn in bad debt, 20% more than
2005 as borrowers walk the fine line of default having over-leveraged in an environment of rising interest
rates in the UK.

Euro:

ECB President Trichet firmed the euro with further warnings of inflationary pressures (nothing new there) and
balancing inflation expectations with employment and growth targets. The euro-dollar cross is looking to find
support at the 1.3160 level which could be reinforced by strong data expected from the individual Euronations
released throughout the course of the morning session.

General News:

• The Yen looks to have weakened in the run up to the BoJ rate decision as worries grow that rates may
not rise in February. Futures markets are showing a 60% chance of a 0.25% hike tomorrow. Fears are
that a hike may cause carry trade positions to unwind suddenly and send tremors through the global
financial markets.
• Canadian inflation figures are released today at midday which should give the Central Bank an idea of
what to do with interest rates with the Loonie looking suspiciously like it has entered a period of consolidation
.
• Very little movement as fears still run through the markets that knock-on effects from Iran may cause
oil prices to spike. With Iran responsible for 5% of global production any act of aggression will see oil
prices rise rapidly. This morning oil trades at $59.29.

Interbank foreign exchange rates:
Updated 19th February
G BRITISH POUND / US DOLLAR 1.9535
GB POUNDS / EURO 1.4819
EURO / US DOLLAR 1.3169
GB POUND / JAPANESE YEN 234.11
GBP/AUD 2.4826
GBP/NZD 2.7839
GBP/ZAR 13.8507
GBP/CHF 2.4080
GBP/CAD 2.2739
GBP/SGD 2.9935
GBP/THB 65.224
GBP/HKD 15.2625