Euro Pounds Brief Tuesday 20th March 2007

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Tuesday 20/03/2007

• Sterling climbs ahead of CPI (inflation) data today
• US housing figures down
• Dollar consolidates ahead of FOMC meeting
• ECB’s Garganas retains hawkish undertones
• Yen suffers as BOJ keeps rates on hold
• Oil holds ahead of expected drop in US inventories

US Dollar:

A mixed day for the greenback ahead of the FOMC meeting today. The problem facing Fed members is that of
rising inflation in a moderating economy. The Fed has no leeway to downplay current inflation risks and will
therefore find it difficult to move sentiment to ‘neutral’ given the underlying concerns in the housing market.
A US housing index yesterday fell from 40 to 36 yesterday underlining concerns that markets have about the
sub-prime mortgage scenario at the moment. Markets are worried that the housing sector is set for a hard
landing despite repeated reassurances from the Fed that we are set for a soft landing. More housing data due
out this afternoon should paint a clearer picture.

Pound:

The pound stayed firmly on the front foot yesterday and overnight posting gains on the dollar and the Euro.
Cable remains in the mid-1.94 area and the pound id above 1.46 against the Euro.
There is a raft of data due out at 0930 this morning including inflation data, public sector financing and mortgage
data. Undoubtedly the headline figure is the CPI which is expected in at 2.7%, the same as the previous
reading. Any deviation will move the market with investors looking at the inflation profile in an effort to gauge
the mood of the MPC. Any increase in CPI will prompt markets to price in a move sooner rather than later.
It is worth keeping a close eye on the mortgage lending data to see whether the recent hikes are biting.

Euro:

The ECB’s resident hawk Nicholas Garganas repeated the standard inflation warnings in an interview yesterday.
He noted that despite the ECB’s interest rates being ‘moderate’ this doesn’t mean the peak of the tightening
cycle is near. The Euro initially took heart from this and had a small rally but quickly pared gains. Construction
data is the only news out of the Euro zone today.

General News:

• Overnight the BOJ kept rates on hold as expected which brought further pressure on the yen. Governor
Fukui repeated that the board will continue to monitor data before making any decisions. The decision
also caused a nice rally in the Nikkei with appetite for risk returning and the carry traders resuming
their tried and trusted yield trades.
• The Aussie dollar reached its strongest since 1996 as yield traders took advantage of the huge gap
between Australian and Japanese interest rates.
• Oil held at a fraction under $60 with the summer driving season approaching in the US and fears that
US inventories will be depleted by demand. This morning oil is trading $59.97.

Interbank foreign exchange rates:
Updated 20th March
G BRITISH POUND / US DOLLAR 1.9484
GB POUNDS / EURO 1.4646
EURO / US DOLLAR   1.3300
GB POUND / JAPANESE YEN 229.33
GBP/AUD 2.4358
GBP/NZD 2.7743
GBP/ZAR 14.4325
GBP/CHF 2.3635
GBP/CAD 2.2926
GBP/SGD 2.9734
GBP/THB 63.985
GBP/HKD 15.2211