[B][U]Talking Points[/U][/B]
· [B]Australian Dollar: Trade Balance Deficit narrows[/B]
· [B]Japanese Yen: Hits 110 hit as yen rate hike prospects non-existent[/B]
· [B]Euro: Stabilizes at 4650 awaiting Trichet[/B]
· [B]British Pound: BOE stays pat[/B]
· [B]US Dollar: Jobless claims on tap[/B]
Bank of England left the overnight lending rate unchanged at 5.50% for at least another month ending rampant speculation that UK central bankers would act preemptively to ease monetary policy in attempt to prevent a slowdown in the economy. Cable which has been battered for the better part of the past few weeks rebounded from 6 month lows at 1.9539 to trade 1.9640 in the aftermath of the news.
As we stated in yesterday’s report “Given the generally hawkish posture of BoE Governor Mervyn King, UK central bankers may choose to wait another month for further confirmation of economic weakness before enacting any changes.” Indeed that is exactly what happened as the MPC decided to err on the side of caution given the elevated readings in inflation and money stock gauges.
Still whether this is a definitive bottom or simply a reflex rally in the pound remains an open question. The majority of the market continues to believe that when it come lowering UK interest rates it is no longer a matter of if but simply a question of when. If UK data, especially consumer related measures begins to show further deterioration then the BoE will be forced to cut rates in February. In the meantime, cable received a temporary reprieve and should stabilize for the time being.
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Soon after the currency market had a chance to digest the latest cable news, attention will turn to ECB. The consensus call is for rates to remain unchanged but the key as always will be the post event press conference with Jean Claude Trichet. As we noted yesterday given the political pressures from French fiscal authorities, “we believe it will be difficult for ECB translate their hawkish rhetoric into action in Q1 of 2008 if economic conditions do not improve.” As markets begin to realize that Mr. Trichet may be all talk, the euro could come in for some weakness, especially against the pound as traders readjust their interest rate expectations.
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