Market News Detail

Pure FX - Foreign Exchange Market Commentary - May 2008

Sterling Overview

I think it would be fair to say that one of the main economic factors recently has been the ever increasing price of oil. Why should this affect currency values? Well at the moment in the UK our economy is slowing but inflation remains above the 2% target, which is mainly down to high food and energy prices. Higher inflation limits the Bank of England’s ability to lower interest rates, as seen earlier this month when the Monetary Policy Committee (MPC) voted 8-1 to leave base rates on hold at 5%.

The most recent housing data from Nationwide indicates prices falling for the seventh consecutive month. On the back of this one would normally expect sterling to weaken, but in actual fact it strengthened. Why? Well despite the onset of the credit crisis the UK economy still expanded inline with forecast last year, and all the latest indicators including retail sales suggest that growth so far in 2008 has been just below forecast.

This is positive and with low unemployment and wage inflation, the UK is reasonably positioned to deal with the current economic uncertainty.

What does all this mean if you need to purchase currency? Our opinion hasn’t really changed and we expect pressure to remain on the pound in the short-term, although please contact your Currency Dealer for a more detailed picture.

GBPEUR

Like the UK, the European Central Bank (ECB) kept interest rates on hold last month at 4%. During the press conference immediately after the announcement, ECB President Trichet continued his stance towards the possibility of having to raise interest rates to peg back inflation. This would tend to strengthen the euro, although with mixed economic data coming from the eurozone if anything we have seen the euro weaken against both sterling and US dollar.

GBPUSD (Cable)

As we thought the US Federal Reserve (Fed) cut interest rates in the US by 0.25% to 2%. This is a much smaller reduction compared with previous months and many economists are suggesting they will not make any more cuts. This is largely down to the fact the US economy appears to be recovering from the credit crisis. With this in mind the US dollar could begin to strengthen, so the favourable buying levels we have been used to could disappear.

GBPCAD (Loonie)

With record oil prices it is no surprise that the Canadian dollar has become more expensive. With the prospect (or maybe wish?) for lower oil prices we might see the loonie weaken.

GBPZAR (South African rand)

The rand has been gaining value recently on the back of raising commodity prices and another hike in interest rates to 11.5%. However with concerns over whether high interest rates will affect future growth, prospects are uncertain for the rand.

GBPAUD (Australian dollar)

The Australian dollar has been one of the main benefactors following the sharp increases in commodity prices. However with the US dollar set to strengthen we could see the Australian dollar begin to lose value as investor confidence returns to the US, and commodity prices ease.

We hope this newsletter has been useful and for further information please contact your Pure FX Currency Dealer on +44 (0) 1494 671800