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23/4/2008 − The Current Market Sentiment

Wed, Apr 23 2008, 07:04 GMT
by Walid Salah El Din

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The greenback is still under pressure as the interest rate outlook differential is still weighed on it. The single currency could have a new record at 1.6014 versus the greenback as expected on the fear of persisting inflation pressure can call the ECB to hike interest rate instead of a cut as what was expected earlier in the beginning of this year as the crediting crisis and the expectation of slowing down in demand and lower rates of growth. The ECB has joined the FED and BOE injecting funds action in the beginning because of this turmoil in the financial market which has been triggered since last August when the sub-prime mortgage bad loans problems have come to the surface causing a serious need of liquidity called the FED to cut the interest rate in a massive way from 5.25% to 2.25% and also the BOE followed it but the ECB is still holding its key interest rate unchanged  at 4.0% as the inflation pressure which is underpinned by the high energy and commodities prices.

 We have recently further comments from the ECB underpinned this sentiment. Merish has told the market that the inflation may no come to the target soon. The target which is 2% and it is currently 3.6% yearly!. Noyer has indicated his concern of the current inflation pressure surprised by some market believers of an interest rate cut. Trichet has said it clearly that interest rate cut will trigger upside inflation pressure fearing of the wage pressure and a second round effect of inflation which should be avoid. It is clear to the market that the inflation is the ghost of the ECB and its main concern currently. In this same time the oil prices are still going up further and further increasing the fear of this inflation building up. The single currency has not find a a way but 1.60 breaking. We have today the release of the weekly US EIA stocks data which has slumped again to 2.3m and further decline can push the oil above 120$.

The cable has been boosted yesterday by the same USD weakness reasons and the need of fighting inflation risk now after the recent announced BOE plans to exchange the mortgage back security by governmental bond which can lightening the pressure on the BOE giving it a space of time for fighting inflation at least by keeping its current 5% interest rate from cutting!. However the cable is still unable to break 2versus the greenback. We have today the market eye on the recent MPC minutes which shows the discussion about the recent .25% interest rate cut decision. An unanimous decision can cause some hurt to the pound. The British pound was under pressure recently since the release of the retail sales like for like which came -1.6%. The BOE chief economist when he said that there can be a slowing down in spending later this year in the BOE recent testify and Mervin king was in a dovish mood giving a concern about the retail sales keeping growing up. So, It is important to watch this week UK retail sales of March which is expected to decline by .3% from a rise in Feb by 1%.

Best wishes

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FX Consultant

Walid Salah El Din

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Published on  Wed, Apr 23 2008, 07:05 GMT