Raphaels Bank Morning Commentary 4th September
publication date: Sep 4, 2008
Australian Dollar 2.1246 Norwegian Krone 9.8354 South African Rand 13.9757
Canadian Dollar 1.8812 New Zealand Dollar 2.5904 Arab Emirates Dirham 6..5448
Euro 1.2257 Swedish Krona 11.6376 United States Dollar 1.7825
Japanese Yen 193.13 Swiss Franc 1.9638 Hong Kong Dollar 13.9115
All Eyes on Interest Rate decision even though no change is anticipated.
Sterling fell to fresh lows on Wednesday but later rebounded after the service sector data lifted some of the gloom surrounding the economy and prompted traders to trim positions ahead of Today’s interest rate decision. Data showing an unexpected improvement in services sector activity, however, gave market players an excuse to buy the currency back at relatively cheap levels, even though the figures showed the sector is still contracting.
Concerns over the bleak outlook for the economy have not gone away, with the recent downbeat assessments of the economy from Chancellor Alistair Darling and the OECD continuing to weigh on investors' minds. The pound weakened yesterday morning after Nationwide Building Society said its shoppers index showed confidence among consumers stayed at the weakest level in at least four years last month. The U.K. services industry shrank adding to evidence the second-largest economy in Europe is heading toward a recession.
The looming threat of recession has left the Bank of England under intense scrutiny as it prepares to announce its latest interest rate decision at 12 noon today. The Bank's Monetary Policy Committee is expected to keep rates on hold at 5% despite evidence the economic outlook is fast deteriorating, but expectations are rising that a darkening economic outlook will force it to cut rates later this year. Markets aren't fully ruling out the possibility of a cut,but the PMI data suggests any policy easing won't be forthcoming for at least another month. Any doubts about the Bank of England's intentions at the policy meeting should have been removed by the latest service sector PMI. Financial markets expect the BoE to cut rates a quarter percentage point by November and again to 4.5% percent by February.
Rates have been kept on hold by the BoE since April, showing that its main focus has been on fighting inflation. However, last week’s Q2 GDP figures showed that the UK economy stalled, with a flat second quarter performance. While oil prices are falling, the sharp decline in the value of the pound is adding to upside inflation risks.
The outlook for the ECB is not bright either; the second reading of the Eurozone’s Q2 GDP was unchanged at -0.2%, showing weakness in private consumption, investment, and trade. Although oil prices and near-term inflation expectations slid this week, euro zone inflation is still almost double the ECB's 2 percent target. The Governing Council is therefore expected to keep benchmark borrowing costs at 4.25 % today and for at least the rest of this year. But ECB watchers believe that a deteriorating economy will eventually force the bank's hand. Growth in the 15-nation region contracted for the first time ever in the second quarter, while, the forward-looking German IFO business sentiment indicator fell to a three-month low in August.
It is believed that the ongoing weakening of the European business cycle and clear signs that euro zone inflation has peaked will ultimately lead the market to price in additional rate reductions later in the year, much like the beleaguered pound.
The pound was at $1.7829 by 8.43 am, up from yesterday, when it fell as much as 1 percent to $1.7668, the lowest level since April 2006. It was at 1.2266 against the euro, after earlier dropping to a record low of 1.2212 overnight.
Before the rate decisions HBOS, the nation's biggest mortgage lender, will say the average price of a home dropped 10.7 percent, a fifth straight month of declines. The data is scheduled for release at 9 a.m.
