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The EUR - Euro weekly update 30 Jun 2008
In this week's
update: Euro rates to rise on Thursday
- UK mortgage approvals slump
- Market awaits ECB press conference
Several times Sterling threatened to head lower, having begun the week at EUR 1.2650. It had to be rescued from below EUR 1.26 on Thursday and again on Friday. In the end it went almost nowhere, remaining within a one cent range and opening in London this morning only just short of EUR 1.2650.
The week's economic data were not particularly helpful to Sterling. Its saving grace was that figures from elsewhere were almost equally as lacklustre. The highlight - if a negative figure can be referred to as such - was the CBI Distributive Trades survey. After the previous week's unbelievably strong Retail Sales performance the market was ready for a burst of harsh reality from the shopkeepers. Forecasters were going for a 16 reading so when it turned out to be only 9 there was a degree of relief.
Rather less satisfactory was mortgage activity among BBA members. The Independent was perhaps exaggerating when it said "the number of mortgages approved for house purchases slumped to an all-time low." It would be a surprise if the figure had not been lower in, say, 1914 or 1939. Yet the point was well made that, compared to a year ago, fewer than half as many people are buying. According to the BBA, "only remortgaging business is holding up, where people need or want to take advantage of deals with other lenders." Scant consolation when there are 15 sellers for every buyer.
Bank of England Governor Mervyn King was slightly less gloomy than usual during his Q&A session at the parliamentary Treasury Committee. He repeated his story about inflation rising above 4 per cent by the end of the year but was evasive about what might happen to interest rates. The media and the market were left guessing and failed to come up with any firm conclusion.
The Euro and the Pound were both bounced as a result of the market's preoccupation with Wednesday's interest rate decision in Washington. The Euro achieved the most mileage because of its status as the biggest non-Dollar currency. It started out with an advantage, in that US interest rates were expected to remain steady at 2 per cent (they did) and Euro rates are assumed to be going higher this week (they almost certainly will).
The $64,000 question is what will happen after that. European Central Bank President Jean-Claude Trichet said after the last policy meeting that rates may go up in June. With the provisional estimate of Euro zone CPI inflation at 4 per cent it is now almost a dead cert. But the market has got into its head the idea that there could be further tightening in the pipeline. Speaking to a European Parliament committee on Wednesday M Trichet tried to dispel that notion. "I didn't say that we would envisage a series of increases. I didn't say that." The ECB "never precommits" on rate decisions, he added.
Precommitment or not, the world waits eagerly to hear what the great man will say on Thursday after his team raises Euro rates to 4.25 per cent. There is almost zero chance that Sterling rates will be going anywhere next week so investors will be doing their best to guess by how much Sterling's yield advantage will eventually be eroded. The more they see the gap narrowing, the less keen they will be on holding Pounds instead of Euros.
Caution is still the watchword, at least until there is some clue that Euro rates will rise no further. Buyers of the Euro should still hedge their risk, using a forward transaction to fix an exchange rate for at least half their requirement.
For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000. Alternatively go to www.moneycorp.com where you can open a free, no obligation Trading Facility.
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