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DJ Forex Focus: Pound Pounces On Dlr, But Still Under Pressure Onet.pl
Any flashy U.K. retail addicts looking to do their Christmas shopping abroad would be well advised to take their pounds to New York rather than Paris. That's because while sterling keeps smashing through major highs against the dollar, it's feeling its own pain against other key currencies - notably the euro. The Bank of England interest rate decision, due at 1200 GMT, is unlikely to change that, even though a growing group of pessimists on the U.K. economy is expecting U.K. rates to start heading lower from the current 5.75%, and soon. Fixed-income markets are pricing in a roughly 25% chance that the BOE will cut rates Thursday - up from around 15% earlier this week. All things being equal, that should undermine one of the relatively high-yielding pound's key supports, and push the currency lower across the board. It's not such an outlandish prediction, even despite recent comments from BOE swing voters Charlie Bean and Kate Barker, who have highlighted that the risk inflation could rise is still foremost in their minds.
The Royal Bank of Scotland - one of very few banks to predict a cut Thursday - stresses that just as credit problems have hit the economy hard in the U.S., the same could happen in the U.K. Forward-looking U.K. data have been the weakest of all the major economies, the bank added. There's therefore a real risk that the BOE might jump in and cut rates to stave off future problems. "The Bank often likes to get ahead of the market, and we think it will do so again (Thursday)," said Bear Stearns' analysts Wednesday. "The credit crunch, financial market turmoil, a cooler housing market, dearer oil, geopolitical risks, weaker growth perceptions, rising job insecurity and reasonably benign inflation risks should all support a U.K. rate cut," the bank added. For UniCredit, a U.K. rate cut is all but certain. It's just a question of timing. "We have little doubt that the BOE is bound to shift its policy stance towards monetary easing, despite some medium-term upside risks coming from high oil and food prices," said Chiara Corsa, one of the bank's economists. But even if - and it's a big if - there's a cut Thursday, sterling's relentless climb against the dollar is unlikely to come to a screeching halt. The pound broke through $2.10 Wednesday for the first time since May 1981 - a move that was greeted by a distinct lack of panic by currency traders. Traders report some strong selling interest just above that level from corporate clients, but the voices calling for a short, sharp pullback at this stage are pretty feeble. That's because sentiment on the dollar is extremely poor and getting worse by the day. Official comments from China Wednesday indicated that it could speed up the pace at which it is diversifying its dollar reserves. Who cares that it's already diversifying out of the greenback, or that the official who made the comments later backtracked on his views, or that no one can agree on how significant his comments really were? It's an excuse to sell dollars, and that's exactly what the market did. In that environment, it would be brave, and possibly foolish, to bet on a drop in the pound against the dollar. But a drop against other European currencies is a much safer bet. The European Central Bank is unanimously expected to keep its interest rate on hold at 4% later today, lending further support to the already-buoyant euro/sterling rate. "While it is fair to say that the euro-zone economy is also on a weakening path, we believe that the vulnerabilities are greater in the U.K., given the consumer-housing link," said strategists at BNP Paribas, who are targeting GBP0.71 for the euro, from GBP0.6978 now. RBS, too, expects sterling to remain weak against non-dollar currencies, and it recommends selling the pound against the Swedish krona. Assuming the U.K. remains the odd-one-out, cutting rates some time soon as others remain on hold or even hike, it's likely to suffer the same weakness as the dollar - the only other major currency affected by rate cuts. In early European trading Thursday, the pound was flat at $2.1017 at 0745 GMT, unchanged from late Wednesday in New York, according to EBS. As the dollar continued to reel from the unwinding of carry trades and concern about fresh equity losses across the globe, the euro pushed up to $1.4664 from $1.4634 and the U.S. currency fell to Y112.65 from Y112.77. The euro was also up at GBP0.6978 from GBP0.6963 and at Y165.18 from Y165.12.
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