Market News Detail

Pure FX - Foreign Exchange Market Overview - January 2008

Sterling Overview

It has been an interesting month for economic news and since Christmas sterling has been under pressure, caused mainly by the credit crunch in the US, continuing issues with Northern Rock and whether the wider UK economy will begin to suffer as a consequence. One of the first main economic indicators for the New Year was news that the Bank of England decided to keep interest rates on hold. Subsequent data releases indicate the economy is stable and broadly speaking growth is falling in line with expectations. Clearly there are pressures in the housing market and on the high street; although after 18 months of interest rate increases by the Bank of England we should not be surprised the economy is now cooling down.

What does all this mean? Looking ahead, whilst the financial markets are still dealing with the credit crunch it is likely to mean tighter lending criteria both in the private and corporate sector. Therefore the general market consensus is for sterling to remain under pressure for the coming months.

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GBPEUR

In contrast to the anticipated interest rate cuts for the UK and US, in the eurozone the view is for interest rates to be increased, caused by inflation running at 3.1% well over the target of 2%. If interest rates are increased, we might see exchange rates move making the euro more expensive. In January we saw both Malta and Cyprus adopt the euro, taking the number of countries using the single currency to 15.

GBPUSD (Cable)

With growing uncertainty over whether the wider US economy is starting to feel the effects of the credit crunch, the dollar has been losing value to a host of currencies including sterling. With the Federal Reserve making an emergency interest rate cut of 0.75% last week and another 0.5% cut last night, it is likely the dollar will remain under pressure.

GBPCAD (Loonie)

Like most other major economies, Canada is keeping a close eye on data to spot any fallout from the US credit crunch. With this in mind the last interest rate decision saw the Central bank reduce borrowing costs by 0.25%. Having said that, with oil prices at all time highs and the economy doing well, we could see the Canadian dollar exchange rate remain at current levels.

GBPZAR (South African rand)

The rand is certainly one of the more volatile currencies, caused mainly by the close link to commodities (copper, minerals, gold). With interest rates currently at 11% and high commodity prices we could see an appreciation in the value of South African rand over the coming months.

GBPAUD (Australian dollar)

With the prospect of increasing interest rates in the coming months, along with the continued appetite for carry trades (A carry trade is when someone borrows currencies with a low interest rate such as the Yen and invests that money in higher rate currencies such as the Australian dollar) it is likely we will see the dollar maintain its value for the time being.

We hope this newsletter has been useful and for further information please contact your Pure FX Currency Dealer on +44 (0) 1494 474466