A relatively quiet week in currency markets with the absence of key data. Sterling traded down on the week against the Euro around a cent and barely moved with the Bank of England’s monetary policy committee decision to keep interest rates on hold as widely expected. The UK central bank has an increasingly difficult task in fighting inflation and most economists are predicting a rise of the CPI index to 4% and above. On the other side of the coin, virtually all economic indicators from the services, construction and manufacturing and production sectors are heading south. The British Chamber of commerce suggested that the UK would be in recession within months and so called housing experts were having a field day commentating on how low prices would fall in the next couple of years. Certainly the outlook is becoming grimmer with the knock on effect of corporate bankruptcies rising to levels not seen for a decade as the credit crunch bites and banks tighten up lending criteria and banking lines across the board to conserve funds and reduce risk. The Bank of England maybe thinking that the slowdown in the economy over the months ahead will offset the inflationary pressures that are continuing to build. Sterling was at 1.2522 against the Euro on Friday and 1.9769 against the US Dollar, both well within their recent trading ranges of 1.25 -1.2730 and 1.96-1.9920 respectively.
The Euro has failed to make any significant gains across the majors as last week’s speech from ECB President Trichet in which he failed to give a further outlook on future interest rate moves dented the expectation that interest rates will continue to rise. German factory orders fell for the 6th month running confirming industrial slowdown with both the high rates of exchange and oil prices taking their toll, however the slowdown as yet appears to be less severe than in the UK and US and the ECB have not changed their rhetoric on fighting inflation so therefore the Euro is likely to retain its strength against the US dollar on interest rate yield differentials. EURUSD was trading off its highs at 1.5780 on Friday morning.
No great shakes form the US this week, rumours of another investment bank in trouble, continued falls in house prices, a small fall in oil prices as the only good news, and further falls in the stock markets to confirm that the bears are now running the show!