Wise Money sees up and downs like a yo-yo

Sterling's rise following the split MPC vote on Wednesday was short lived as UK retail sales data for June released yesterday plummeted.

Sales fell in all but one sector, with clothes, shoes and household goods sales severely hit. The sharper-than-expected decline drove the pound lower as investors bet the Bank of England may have to cut interest rates to bolster the economy.

The Office for National Statistics said retail sales volumes fell 3.9% in June, the sharpest fall since records began in 1986, after an upwardly revised 3.6% increase in May.

Analysts were expecting a fall of just 2.5% and an annual gain of 4.4% but annual growth was just 2.2% compared to 7.9% last time. While the Bank of England has given little sign that lower borrowing costs are on the way, because inflation is running at its strongest rate in more than a decade, most economists think rates will need to fall eventually.

It was also bad news for the Euro zone with German business sentiment declining sharply. The Ifo business climate index fell to 97.5 from 101.2 in June, its lowest level since September 2005.

Also of concern to policy makers at the ECB will be the fact that both Manufacturing and Service sector PMI indexes also fell in June. Services PMI declined to 48.3 from 49.1 in May its lowest reading for 5 years while Manufacturing PMI dropped to 47.5 from 49.2 - readings under 50 indicate contraction.

It wasn't any better stateside either. The US weekly jobless claims jumped by 34,000 to 406,000 from 372,000 the previous week and new home sales were down 2.6% in June to record their lowest level for 10 years.

With the crucial US Non Farm payroll numbers due out next Friday the jobless claims does not bode well. Wall Street closed 283 points lower on the back of the weak economic data and the record losses announced by Ford. The car giant's second quarter loss amounted to US$9 billion as sales of trucks and larger vehicles plummeted.

US crude oil prices bounced a little from recent lows to close at $126.15 yesterday with Brent crude also closing up at $126.96.

The Aussie Dollar has come under further pressure following an announcement by the National Australia Bank that they have written off A$798m in credit market related losses thereby increasing speculation that the Reserve Bank will need to cut interest rates sometime soon.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money eyes turn to euro debt consolidation rates

With a raft of data and announcements due out today and the shortened week for the US, today could prove rather volatile.

It has now been officially confirmed that the Dow Jones Industrial average sank into a bear market on Wednesday, closing more than 20 percent below its October peak, while the benchmark S&P 500 teetered on the brink of bear market territory.

In overnight trading we have seen Oil hit further highs. Jumping about a dollar, London Brent crude rose as much as $1.49 to a record of $145.75 a barrel and U.S. crude rose as much as a $1.00 to an all time high of $144.57, before easing back to $144.19.

The dollar also fell sharply against the Euro overnight, after a report the previous day showed U.S. private employers cut the most jobs in nearly six years and also on the back of weakening stock markets.

In contrast the euro was well supported ahead of today's rate decision with the BIS being a notable seller of Euro at 1.5840 for most of the morning.

At 10:00 we have EMU retail sales. After three consecutive falls, markets are looking for a slight increase for the month-on-month figure.

Then come lunchtime when we have the 2 big events of the week. At 12:45 we have the ECB rate announcement.

As stated previously the euro is finding good support ahead of the decision, with a large consensus of market believing that a hike of 25bps is a done deal. The statement that follows (13:30) will be closely scrutinised, as the ECB has tried to tone down the significance of key expressions of late and a moderate tone is expected.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Does CPI at 4% guarantee an ECB hike on Thursday.

Yesterday's Euro zone inflation jumped to a record high of 4.0 percent in June, data showed on Monday, cementing expectations the European Central Bank will raise interest rates this week despite slowing economic growth.

The 4.0 percent year-on-year figure for price growth in the 15-nation eurozone represented a leap from May's 3.7 percent, moving further from the ECB's target of just below 2 percent and the highest figure since measurements started in 1997.

Following the report EUR/USD pushed up to 3 weeks highs of 1.5836, before retracing following stronger than expected Chicago PMI and a statement from U.S. Treasury Secretary Henry Paulson.

He again re-affirmed the Fed's belief in a strong US dollar and also stating that the price of oil is now creating a big burden on the world economy.

GBP/EUR remained pretty flat throughout the day and GBP/USD fell away from its day highs off 1.9966 taking its lead from EUR/USD.

Moving onto today we have already seen the release of the Nationwide building society house price survey. As expected this came out on the downside showing house prices fell 0.9% in June.

House prices have been falling non-stop since peaking last Oct at an average 186,044 pounds, according to Nationwide data, and stand 6.3% lower than a year ago in June, the weakest annual rate since Dec 1992.

Also this morning we have seen the release of Spain's PMI, falling to 40.6 in June from 43.6 in May, lowest in the survey's history.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money eyes on Europe.

This week the main focus of attention will be data released from Europe. The ECB has a rate decision on Thursday that may challenge the potential market movement of the US non-farm payrolls report.

Due to the shortened week in the US (Independence Day), Non-farm payrolls will actually be released on Thursday instead of Friday and should coincide exactly with Trichet's post meeting press conference.

A quarter point rate hike has been completely discounted by the market, although certain ECB officials have been at pains to state that this is not a foregone conclusion.

Ahead of the rate decision on Thursday in Europe we have consumer spending and employment numbers from Germany along with Eurozone producer prices.

In Asia trading we have seen Oil prices spurred by brewing Middle East tensions, climbing near Friday's record high $142.99 a barrel and weighing on Asian stocks, which posted their worst first-half year performance in 16 years.

The US dollar also fell to three week lows against the Euro following the surge in Oil and falling stock prices.

Fears about dwindling oil supply were already heightened when Libya's most senior oil official said last week he was studying the possibility of cutting output in response to U.S. threats to sue OPEC members.

The British Pound rose to a 2 month high, with housing market indicators, service and manufacturing PMI reports due for release this week and GBP/USD trading above 1.99, there is a strong chance that we may see a retest of 2.0.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

FTSE's Four Day Losing Streak Broken.

Strong US retail figures released yesterday provided some welcome news for the markets; suggesting that the US might possibly avoid slipping into recession.

The reported 1% increase in May's US retail figures strengthened the dollar and forced US government bonds to fall on the increased likelihood that the Fed will raise interest rates in the foreseeable future.

The ECB moved to dampen market expectations of a flurry of interest rate rises in the coming months by signalling that the planned increase in July is likely to be a one off. This lead to a fall in European Bonds.

Yesterday's release of Eurozone's industrial production figures showed a 0.9% increase in April which should provide a further boost for the European economy.

This better than expected data release had a positive impact on world markets with the FTSE rising to 5790.5, having lost 4.5% in the previous 4 days.

The FTSE is expected to have another good day, with the market set to react positively to RBS's expected sale of Angel Trains to Babcock & Brown. US markets were up, with news that Lehman Brothers will remove their CFO and COO (Erin Callan and Joseph Gregory) following their $2.8bn second-quarter loss.

Moving on to currency markets, consumer confidence, justified by yesterday's rise in US retail sales figures has helped the dollar hit a 3 month high against a basket of currencies, against the Euro it peaked at 1.5422 and gained ground against sterling to 1.9473.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

ECB comments dampen the euro

This morning the Euro has weakened against the dollar on the back of ECB comments yesterday that multiple interest rate hikes are unlikely.

In addition, InBev of Belgium's pending acquisition of Anheuser-Busch for $47bn may lend additional support for the dollar as the market anticipates InBev's USD requirement.

In the US, the Fed's beige book survey of data and information reaffirmed the weakening economic conditions stemming from softness in consumer spending, higher food and energy prices.

Corn prices have been on a run, continuing yesterday and giving support for other agricultural commodities. Oil prices continue to rise, moving up more than $5 a barrel yesterday. Globally, stock markets closed lower with the FTSE 100 index falling for its fourth consecutive day of losses.

As the market reassesses the interest rate structure for the euro, sterling has gained a bit of ground. In the UK however, economic data is dire with an increase in unemployment and the trade deficit and average earnings down fueling opinion that recession in the UK is very real possibility.

Economic data to watch for today is US retail sales figures out at 1.30pm and this afternoon Bernanke is speaking again. Tomorrow the G8 finance ministers are meeting in Osaka to reportedly discuss the rise of oil and food prices impact on the global economy.

Last of the most important announcements are the inflation numbers from the US on Friday afternoon. High readings will further support expectations for interest rate hikes from the Fed going forward.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Oil price continues to strengthen

Global equity markets succumbed to a new sell-off at the end of last week amid jitters among investors over key economic releases and further oil price rises.

The US Labour Department on Friday reported a 0.5% increase in the unemployed American workforce (non Farm payroll) for last month, equating to 49,000 people losing their jobs.

This increase in the unemployment level was last seen in February 1986 and a level last encountered in October 2004.

Morgan Stanley (MS) issued a statement forecasting oil prices to breach the $150/barrel mark by July 4, this sent light sweet oil prices to $139 at the end of last week.

MS believe investors will continue to buy oil to hedge themselves against the foreseeable depreciation of the US dollar. The question is, how much this hedging is pushing the market against speculators pushing this oil price higher?

Closer to home the Bank of England is set to name its chief economist Charles Bean as deputy governor after a long standing dispute between the BOE and the Treasury.

This appears to be good news for Mr King as Mr Bean is his preferred choice of the two candidates.

In Europe it is well known that European central bankers have tended to follow the US Federal Reserve actions. However, comments made by Jean-Claude Trichet, ECB president indicated a misalignment in their interests.

Trichet signalled the ECB’s intentions to take a hawkish stance, by last week stating it was preparing to raise interest rates by 0.25% in July to curb the ever growing inflationary pressures within the Eurozone.

Trichet'€™s statement was soon followed by a 1.3% appreciation in the euro to 1.5749 US Dollars.

Sticking with currencies Sterling fell against the euro this morning which is the fourth consecutive day, dropping to £0.8014/euro. Against the dollar, it dropped to $1.9685, from $1.9708.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Euro rallies on ECB rate rise hint

ECB President Trichet statements dominated the market yesterday after delivering surprisingly hawkish comments following a widely expected unchanged rate decision- leaving its key lending rate unchanged at 4%.

He indicated that some ECB officials argued for rate hike later this year, and that the central bank is in a state of "heightened alertness" over inflation. This caused the euro to strike back on foreign exchange markets on Thursday, bringing a speedy end to the US dollar's Bernanke-inspired rally while also advancing strongly against sterling.

This straight talking about the exchange of opinions by the ECB board members leading up to the rate decision suggest that there is an increased possibility of a rate hike in July/August.

On the back of a weaker dollar yesterday, Crude oil closed up $5.49 on the day.

The Bank of England also left rates unchanged at 5% on Thursday and is expected to remain on hold for some time as the country faces the combined effects of slowing economic growth and soaring inflation.

However, while most economists agree that near term inflation expectations will probably keep the BOE from cutting rates in the near term, expectations of a further deterioration in economic conditions is likely to bring rate cuts back on the table by year-end. Time will tell.

The US non-farm payrolls report is out today, this is one of the most critical releases for the US dollar, not only because it is market-moving, but also because it can help us gauge the broad status of the economy.

Currently, the consensus estimates are for a drop of 60K, which would mark the fifth consecutive month of job losses. Regardless of how payrolls fare, the news is likely to spark significant volatility.

The National Bureau of Economic Research believes that over the past 3 decades, the US economy has gone through 3 recessions. In each of those 3 recessions, there was a string of job losses that lasted for a minimum of 10 months.

So far, non-farm payrolls have fallen negative for the past 4 months, and the May report is anticipated to bring this tally up to 5.

Some argue that the current downturn in growth could be more severe than the recession in the early 2000s due to the triple blow of a housing crisis, credit crunch and skyrocketing commodity prices.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money asks if an ECB rate cut is wishful thinking

Prominent fears of stagflation (inflation and stagnation) appeared to contribute to the Sterling weakness against the US Dollar yesterday.

Not helping the GB Pound was the release of a Hometrack survey showing a fall in house prices in England and Wales for the eighth month running and a 40% year-on-year drop in April's mortgage approvals.

Across the pond the US Dollar experienced a lift following a report showing stronger than expected US new home sales data and a retreat in oil prices. This phase did not last long however as the EUR took the lead once again.

The US Dollar fell compared to the Yen and CHF following the FBI saying that a video will be posted soon urging Islamic militants to attack the West via biological, chemical and nuclear weapons.

Oil is the key at the moment for the greenback as they seem to move inversely in recent times. If we see a fall in oil prices inflation worries will quieten down and make investors believe the worst is over.

Recent data released in Europe gave reason for concern over the health and stability of its economy. The EUR suffered following a slump in French business confidence to a 2.5 year low and an unforeseen decrease in Germany's consumer morale for the month of June.

Investors are looking for action from the ECB and a change from its neutral perspective to dovish. However ECB members themselves declare this as "wishful thinking" and a different approach to its monetary policy is yet to be seen. Looking at the global economy market participants feel that the US has seen the worst of it and that Europe is only at the start of its economic slowdown.

The FED has adopted a very dovish tone since fears of a recession first appeared and tried to counter-act with rate cuts totalling 3.25 percentage points since September however with inflation now beginning to be the main focus the market will be looking for the Fed's next move to be an increase in rates.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US Dollar falls against euros

The dollar fell to $1.5678 yesterday, the most in a month against the Euro as the price of oil rose above $129 for the first time and speculation increased that the European Central Bank will keep interest rates high.

The rise in the Euro was in spite of a weaker than expected ZEW economic expectation figure out of Germany. Economists expected a gain to minus 37 from minus 40.7 in April; however the gauge declined to minus 41.6.

The Euro is also being buoyed by the continued hawkish nature of the European Central Bank and gained after the head of the ZEW centre and adviser to the German government Wolfgang Franz said "European policy makers may raise interest rates as soon as the financial crisis ends".

Wolfgang, one of the five advisers to the German government told reporters "I would recommend that the ECB keep rates constant until there is clear evidence the financial crisis is over, then the ECB might need to raise rates to take care of inflation". Euro focus today will be on the IFO release for Germany.

Most attention today will be focused on the minutes from the FOMC and BoE. There is market speculation that the minutes from the April 30th FOMC meeting will suggest that the Fed is finished with its most aggressive easing campaign in decades after the 25bps cut down to 2.00%.

However there is still thought to be a considerable difference of opinion between policy makers and the minutes are eagerly anticipated as they ought to provide some sense of whether most members are more worried about the outlook for growth rather than inflation.

Minutes from the BoE meeting on May 8th are released today at 9.30. After late speculation that the bank would opt for another cut after a string of weak data released prior to the meeting, rates were left on hold at 5.00%.
The main focus today will be on the voting split between the members and the discussions that led to the unchanged decision. This should provide an indication of sentiment for the future and what we can expect in the short term.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bank of England- between a rock and a hard place.

Today we have the release of the Quarterly Inflation Report accompanied by the post release Question & Answer session.

In a normal market the combined effects of downward pressure on consumption, tumbling consumer confidence, high street sales falling 1.5% year on year, multi million Pound write-downs from the residential property sector, a softening of the holiday booking industry and the threat from the recently nationalised Northern Rock that the labour Government will not get "our" money back for a lot longer would suggest that any inflationary pressures would be subsiding.

Unfortunately that is not the case because inflation is rearing its ugly head. The strong output prices earlier in the week had set the stall and yesterday's CPI number came in at a shocking 3%.

Mervyn & the team must be getting very worried that they will have to write another letter to the Chancellor explaining why inflation is running above 3%.

We would hope that the Bank of England is looking at the bigger picture and the slowing economic environment will drag the inflationary threat lower over time which in turn means there is still the potential for lower interest rates with a Bank Rate of 4.50% still targeted in this cycle.

There was a proliferation of comment from 5 Fed members last night, including the Chairman Ben Bernanke. All followed the same theme of inflation concerns and the need for a stable Dollar, but each with their own nuances.

The most important of these additional comments in my view came from Fisher who stated that the Fed and the ECB were working together to ensure long-term confidence in the Dollar. The implications are that we have seen the top in EUR/USD for the foreseeable future at least (it topped out at just above 1.60 immediately following the last G7 meeting - the significance of which looks more important with each passing session).

The Foreign Exchange markets were reasonably quiet yesterday given the importance of the data and cable traded in a narrow 50 bp range for most of the day with even the much higher than expected UK CPI figure failing to drive it lower.

The Dollar's strength overnight has succeeded in pushing cable down to the 1.94 level but a look at Sterling's performance against other majors underlines the fact that this latest volatility is Dollar based.

The Inflation report at 10.30 followed by the German IFO at 11.00 will be the catalysts that mould the rates early on (a BoE stance as anticipated and a weak IFO could see Euro/GBP lower) and the US CPI data at 1.30 this afternoon will likely be the precursor to further Fed comment and a stronger Dollar later.

We also see UK claimant count rate/ jobless claims/ average earnings/ unemployment rate released. These should provide further evidence of the UK economic slowdown and as such be the Rock to inflation's Hard Place that the MPC finds itself between.

Ensuring that inflation remains a thorn in everyone's side, the oil price continued its inexorable rise reaching a new high above $127 per barrel following rumours of production being reduced. This after the IEA had cut their estimates of global oil demand for the rest of the year.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

More weak housing data from the UK

Last night we saw data come out from The Royal Institution of Chartered Surveyors showing the house price balance has fallen in the first 3 months of the year to -95.1 from -79.4 in March.

Monthly volumes of sales has also dropped to 18.1 from March's 22.2. This news was badly received by Sterling which fell to 1.9486 against the US Dollar and 1.2550 against the Euro.

Alliance and Leicester in a trading statement this morning announced a further writedown of £192 million.

Although a large amount to have written down their outlook remains very positive and they confirm that they have strong medium term funds secured into the second quarter of 2009.

Meanwhile, HSBC have been downgraded from Neutral to Sell by Merrill Lynch on the back of their short term earnings risk.

UK CPI this morning at 9:30 BST will give a taster of what will follow in tomorrow's Bank of England Inflation Report. Given the frailty of Sterling at present, a weaker currency on the back of the figures has to be a better bet in the short term.

News that Spain's annualised CPI has risen to 4.2% YoY has been largely ignored by the market although the repercussions for the ECB must occur sooner rather than later.

Bernanke is one of several scheduled Fed speakers today so any clues on the Board's current thinking will be looked for. As most of the speeches occur after our close, overnight moves will be the order of the day.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Central Banks Keep Rates on Hold .. Oil surges to new record high

Yesterday we saw the MPC decide to keep UK rates at 5% for a further month. Until we get the minutes of the meeting released on the 21st May, we will not know how close a decision this was.

With the current raft of weak data coming from the UK I would imagine there was quite a battle of words between the inflation focused hawks and the doves concerned with sputtering growth.

The ECB also left rates unchanged with their reference rate held at 4% for the 11th month in a row.

The statement from ECB President John Claude Trichet, that immediately followed the meeting left the market in no doubt that the Central Bank's main concern was still very much the fight to stave off inflation.

It looks very unlikely that we will see a move in Euro rates now until well into the second half of the year even though the economic signals from the majority of the member states are getting weaker by the day. German export numbers yesterday underlined this with the strong Euro damaging business outside the region whilst weak demand from within the Eurozone accentuated the problem.

The resultant FX reaction was muted although by the end of the day Sterling did weaken against both USD and Euro.

The outlook on currencies remains clouded with the Market currently making money by being long of Dollars but still unsure that both the US economy is out of the woods and that the US are supportive of a further strengthening in their currency.

Commodities, and especially oil, were the dominant movers yet again with the price of crude going above the $124 per barrel for the first time ever - suddenly, the prediction from Goldman Sachs that oil will reach $200 per barrel this year doesn't look too off the wall.

The resulting economic Global slowdown if this occurs would be severe in the extreme. On the other side, base metals fell in active trading.

Today we are light on the data front with just the US Trade Figures at 1.30 to look forward to. Given the fine weather, this might not prove a strong enough draw to keep the market bubbling into the afternoon.

Next week looks more interesting with the highlight in the UK being the release of the Bank of England's Quarterly Inflation report. The data plus the question and answer session that follows will set the stage for the MPC meeting in June and as such should provide a good clue as to which way the committee will swing.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money eyes on the BOE and the ECB today.

The Pound took a further bashing yesterday now reaching an 11 week low against the dollar.

Sterling came under severe pressure after the UK Industrial Production figures were much worse then anticipated, with a 0.5% fall month on month. The continued weak data for sterling has raised discussions that the BOE will be forced to cut rates by a further 25bp at the meeting today.

However with UK inflation data due to be released next week many economists believe the BOE will hold rates until this data is revealed. The inflation data is expected to hit 3% so it may be seen as irresponsible for the BOE to cut rates before this important data is released.

This 3% level is extremely significant because the MPC will have to write letter of explanation to the treasury explaining why inflation is so high.

A panel of 9 financial and economic experts which make up The Times Shadow MPC also recommend that the sterling base rate remains on hold at the meeting today. The votes were swayed 5 to hold and 4 to cut.

The retail sales in the euro zone were released yesterday morning, highlighting the worsening European economic performance we have seen over the last few weeks.

The retail sales fell by 0.4% in March similarly placing pressure on the ECB who are meeting today as well.

However the ECB who are also faced with similar pressures of rising inflation and slowing growth are also expected to keep rates on hold. What will be of more interest to the market will be the comments of Trichet in his press conference following the rate announcement where he is expected to emphasise the downside risks to the economy.

The dollar on the other hand has been heading towards recent highs against a basket of currencies. Fed officials have hinted that the hard-line rate cutting may be lapsing with US Treasury Secretary Henry Paulson stating in a recent Wall Street Journal interview that 'the worst seems to be behind us.'

The BOE are due to make the rate announcement at 12.00 today followed by the ECB at 12.45. Further to this data out today is the US initial jobless claims out at 13.30.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Euro Inflation takes to the stage

Euro zone inflation took centre stage yesterday as Jean-Claude Trichet spoke at a conference in Vienna. The European Central Bank President made it clear that the governing council must use interest rates to deliver price stability.

Any other considerations, such as growth and employment are secondary. These comments effectively dismiss the recent calls from French and Italian government officials for growth to be taken into account.

Inflation which reached 3.6% last month, the fastest pace in 16 years, has led to the ECB leaving rates unchanged. It appears this may be the same reason for the repo rate remaining at 4% in the near future. In the same speech, Trichet again voiced his concern about the euro's strength and the impact it has on European exports.

The euro bounced back against the dollar during yesterday's trading, after three days of declines. Yet another occasion on which Trichet talks tough on inflation, also mentions the detrimental effects of a stronger euro and the market automatically pushes the single currency higher.

There was additional evidence, provided by the Hometrack Ltd survey, that the UK housing market is correcting. The results which were released early yesterday showed the average price of a home declined a further 0.6% in April. This is the biggest month on month drop in over three years for this report.

Oil prices climbed again to reach a record $119.93 a barrel, caused by a strike at a refinery in Scotland and further violence in Nigeria.

Possibly of greater interest is that the EUR/ USD cross rates has had a correlation of 0.96 with the price of oil. Just a bit closer and it's a perfect hedge.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Currency converter sees strong US data

Earlier last week, the chance of a 25 vs. 50bp rate cut was close to fifty-fifty. Now, the odds for a half point cut are less than 25 percent because the payrolls figure was not bad enough to warrant a larger rate cut.

Managing expectations has become a big component of the Fed’s job these days whether they are willing to recognise it or not. If the market is pricing in a quarter point cut and the Fed under delivers by leaving rates unchanged, they risk triggering a sharp re-pricing of the yield curve.

If they over deliver by cutting interest rates 50bp, it could cause many people to wonder whether some bad news has yet to be discovered.

The Federal Reserve’s interest rate decision has the power to shift the trend in the market, but they will probably contain volatility by releasing a more cautious FOMC statement that points out the risks of both growth and inflation.

If the Fed fails to give the markets the clarity that it needs, producer prices, consumer prices and retail sales will. If inflation and spending remains strong, then the recession story gets shelved for the time being and the dollar could see a short term recovery.

The other releases that we are also expecting are pending home sales, the US trade balance, import prices and industrial production.

Is the European Central Bank just talk or will they actually follow through with an interest rate cut?

Unfortunately, this question will not be answered until the next ECB meeting on January 10th at the earliest. With each passing day however we have more reason to believe that the ECB could actually make good on their threats.

On Friday, German industrial production was stronger than expected while the OECD leading indicator for the Eurozone remained unchanged at 98.4. Even the Eurogroup which has previously called for the ECB to step in and stop the Euro from rising now says that the economy is proving resilient in the face of shocks.

In the week ahead, we do not have many important pieces of data other than the German ZEW survey, which has been losing its market moving potential because it has repeatedly called for a slowdown that has yet to unfold. This means that US data will probably dictate the movements in the EURUSD.

Meanwhile aside from the Federal Reserve, the Swiss National Bank also has an interest rate decision. They are widely expected to leave rates unchanged, but there is a risk for a surprise rate hike or at least hawkish commentary from the SNB.

GBP

The British Pound recovered for the second day in a row which says a lot because it comes on the heels of the first interest rate cut in two years.

The futures market is still pricing in 50 to 75bp of easing next year and if expectations are correct, then the pound should continue lower. However there are often retracements within a broad downtrend and we expect to see one at the beginning of this week.

Before Tuesday’s FOMC meeting, we are expecting producer prices and the trade balance. The UK trade deficit should improve because the export component of manufacturing PMI accelerated last month.

We already know that inflation is a problem because the latest monetary policy statement talked up the risks to short term inflation. However anything goes after the FOMC meeting because the US rate decision could shift the near term outlook for many currency pairs. On Wednesday we also have UK employment data which we expect to be pound bearish.

Prices at the London open
GBPUSD – 2.0321
GBPEUR – 1.38.73
EURUSD – 1.4649
GBPJPY – 226.64
GBPCHF – 2.2936
GBPAUD – 2.3133
GBPCAD – 2.0390
GBPZAR – 13.6596

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK interest rates down to 5.5 pc, ECB stays on hold at 4pc

The euro made strong gains across the board after hawkish comments from European Central Bank chief Jean-Claude Trichet reinforced the idea that euro zone interest rates are likely to head higher still.

Following the ECB's decision to hold its key rate at 4.00 %, Trichet said in a press conference the central bank is ready to counter growing inflation risks. He also revealed that the governing council discussed the possibility of a rate hike at its meeting yesterday.

In parallel, the ECB raised its inflation forecasts and downgraded its growth predictions. Despite the prospect of lower growth, price pressure appear to remain the ECB's primary concern.

Elsewhere, the Pound recovered from losses incurred after the Bank of England cut interest rates.

The UK currency dropped to a 10-week low against the dollar and sank against the euro after the BoE lowered the cost of borrowing to 5.50 % from 5.75 %. It said the UK economy has begun to slow and inflation should be tempered by flagging demand.

Analysts said rates may have to fall as low as 4.00 % to avoid a brutal economic slowdown.

The Pound weakened steadily against the euro but gradually recovered from its steep fall against the dollar, helped somewhat by poor US jobs data. First-time claims for unemployment insurance rose to their highest in more than two years in the four weeks to Dec 1, with 338,000 new claims filed.

The data add to an increasing bulk of evidence that the US economy is heading for a sharp slowdown, and will fuel expectations for more rate cuts from the Federal Reserve in the months to come.

The Fed announces its next decision on borrowing costs on Tuesday and todays non-farm payrolls report for November will again be crucial for the market's expectations ahead of the meeting.

Wednesdays estimate from the ADP payrolls firm was for a rise of 189,000 in the November payrolls. This is more than twice the 65,000 increase analysts had forecast for the official non-farm payrolls figure today, although analysts point out the data is notoriously volatile.
Prices at the London open
GBPUSD – 2.0235
GBPEUR – 1.3856
EURUSD – 1.4599
GBPJPY – 225.11
GBPCHF – 2.2918
GBPAUD – 2.3075
GBPCAD – 2.0438
GBPZAR – 13.6011

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Weak dollar under pressure from FED comments

The dollar sank across the board, hitting a new 26-year low against sterling, in the immediate aftermath of comments from US Federal Reserve Bank chairman Ben Bernanke.

The central bank chief said the Fed is ready to counter the inflation risks caused by high oil prices, suggesting US rate-setters will be reluctant to lower interest rates further despite some signs of slowing growth.

Further sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity. There is no Goldilocks scenario from Bernanke who sees risks from inflation and an economic slowdown, the worst of both worlds.

Currency markets have been expecting the Fed to cut interest rates again in December, following reductions in the Fed Funds rate totaling 0.75 percentage points since the summer.

The central bank has said these cuts, bringing the benchmark rate to 4.50 %, were a pre-emptive move to stave off an economic slowdown as the housing market continues to decelerate and financial markets slowly recover from their turbulent summer.

Despite Bernanke's hawkish undertones, however, the dollar fell as markets appeared to focus on the negative economic tone of the speech. The US currency fell across the board, sinking to 2.11 against the pound, a new low since 1981.

The Pound had already strengthened to new dollar highs yesterday, after the Bank of England held rates at 5.75 %, quashing a growing minority view that it could reduce borrowing costs following a weak run of data. Nonetheless, analysts are convinced the next move in interest rates will be down, and some are speculating on a cut as early as next month.

With the economy facing the headwinds of previous interest rate hikes, considerable sterling strength, tightening credit conditions and rising energy costs, we see no need for the repo rate to remain at the present restrictive level of 5.75 %.

Mortgage calculators expect the first 25 basis point ease by February at the latest, with the clear risk that the BoE could begin as early as next month if leading indicators continue to soften rapidly.

The European Central Bank also held rates, at 4.00 %, a decision fully expected by markets. Most analysts believe the central bank will keep rates unchanged for some time as it tries to balance increasing euro zone inflation pressures with slowing growth.
Prices at the London open
GBPUSD – 2.1093
GBPEUR – 1.4367
EURUSD – 1.4680
GBPJPY – 237.38
GBPCHF – 2.3757
GBPAUD – 2.2789
GBPCAD – 1.9610
GBPZAR – 13.4263

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.