Euro Pounds Brief Thursday 22nd March 2007

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Thursday 22/03/2007

• MPC votes 8-1; Blanchflower for a cut
• Sterling loses ground on MPC votes
• Fed leave rates at 5.25% and drops tightening rhetoric
• Euro hits 2-year high against US dollar
• Yen remains on the retreat with Fukui reiterating a slow policy
• Oil extends gains on a sharp fall in US stocks

US Dollar:

Last night the Fed opted to keep the overnight rate on hold at 5.25% however the accompanying statement
was the market mover. The Fed dropped the ‘additional firming’ from the release indicating that it sees a
softer US economy. They are still on guard against inflation risks which tempered a major downward move for
the dollar. Cable rallied to mid 1.96 on the release and Euro-dollar jumped towards 1.34. This morning the
dollar looks soft with plenty of sellers in the market.
Sub-prime fears are still spooking the market with some lenders no refusing to back any borrowers that can’t
put down a 5% deposit. The US housing market looks like it’s heading towards a hard landing.

Pound:

The MPC surprised markets yesterday with their voting pattern. The board voted 8-1 in favour of holding
rates with David Blanchflower surprising markets with a vote for an immediate rate cut. Sterling initially
dropped on the data but markets quickly discounted the vote on the back of the surprise jump in inflation
data on Tuesday. The minutes were from a fortnight ago and the MPC were not privy to the inflation data. The
MPC did warn of the inflation risks posed to the economy which underpinned sterling.
Gordon Brown’s budget yesterday helped to support the pound with his 2p cut in income tax. In addition his
extra duty on alcohol, tobacco and driving will add to inflationary pressures. Today we have a minor industrial
trend data release which should give the market time to digest yesterday’s data.

Euro:

The Euro rallied sharply yesterday on the back of the Fed release hitting a 2-year high on the dollar. With ECB
members continuing their hawkish sentiment the Euro looks firmly rooted. Eurozone interest rates may well
go beyond the 4% seen by the futures markets. Today we have the EC trade data and with the strengthening
Euro we may see a small downside.

General News:

• The yen remained on the back foot in a quiet market with the carry trade dominating moves in the
day. BOJ Governor Fukui repeated his policy that the tightening will remain on a slow and measured
basis.
• The commodity currencies are looking strong today with carry trade activity. Sterling remains in the
2.43 against Aussie and well under the 2.80 on the Kiwi.
• Oil rallied yesterday on an unexpectedly large drop in US inventory data on heightened fears that there
may be a supply squeeze in the summer months. Texas gold trades $60.18.

Interbank foreign exchange rates:
Updated 22nd March
G BRITISH POUND / US DOLLAR 1.9674
GB POUNDS / EURO 1.4712
EURO / US DOLLAR   1.3368
GB POUND / JAPANESE YEN 230.93
GBP/AUD 2.4366
GBP/NZD 2.7704
GBP/ZAR 14.3186
GBP/CHF 2.3803
GBP/CAD 2.2745
GBP/SGD 2.9847
GBP/THB 63.671
GBP/HKD 15.3592