Foreign Currency Report 05 April 2007

GBP
The prospect of a two dollar pound has resurfaced as market expectations of an interest rate hike today at the Bank of England continue to build.

A poll of economists found only a quarter expecting a quarter point rate increase to 5.50 percent with the market is attaching a 50 pct probability.

Market analysts have said "There's still some additional data that may provide further direction, but the consensus (for a rate hike) has built and arguably it would take some significantly negative numbers to see opinions shift to counter this (move in sentiment)'
This shift in expectations has helped the pound move up its highest level for a month against the Dollar and the Euro.

However, some currency watchers are growing increasingly uneasy ahead of today's decision. Despite predictions of a hike, traders are urging caution with holding out for a sharp increase in Sterling strength as seen in January as a decision to leave rates unchanged would likely lead to a "very sharp reversal" in the pound.

The lead up to today's decision has boosted Sterling already and the upside from a BoE hike may be limited given the sharp appreciation over the last few days.

Securing currency at the levels the market is trading at currently would still guarantee favourable rates.

All traders will be firmly focused on the Bank of England and will be able to fully update you on the short term direction of the pound.

US Dollar
The dollar fell the most in more than a week yesterday against the Euro as signs of a U.S. economic slowdown increased the likelihood that the Federal Reserve will reduce borrowing costs in the third quarter.

Reports showed U.S. service industries expanded at a slower rate last month and factory orders rose in February less than economists forecast. Crude oil also plunged, curbing the U.S. dollar's losses.
The data ``pointed to the slowdown in the U.S. economy, raising concern that we might see lower interest rates this year,'' said senior currency strategists.

The U.S. dollar's drop was limited before a government report due on April 6 that is forecast by economists to show job growth accelerated last month. The Labour Department is expected to report U.S. employers added 133,000 Non Farm jobs in March, up from 97,000 a month earlier,
``People don't want to buy big positions before the payroll,'' said Rafael Martorell, chief dealer of spot foreign exchange in New York at BNP Paribas Securities SA.

Interest rate futures suggest a 60 percent likelihood the Fed will cut its target rate for overnight lending between banks to 5 percent from 5.25 percent at within the next few months. Markets have been pricing in a rate cut as early as March 12.

The British pound held near a three-month high against the dollar on speculation the Bank of England may increase borrowing costs today.

EUR
The euro got a boost as German manufacturing orders rose the most in more than two years in February. European Central Bank governing council member Vitor Constancio said interest rates in the euro zone are still low in real terms.

German factory orders, adjusted for seasonal swings and inflation, increased 3.9 percent from January, when they declined 0.3 percent, the Economy and Technology Ministry said today. The median forecast of 38 economists surveyed by Bloomberg was for a gain of 0.5 percent.

The reports ``clearly showed that higher interest rates in Europe didn't have a negative impact on the economy,'' said Boris Schlossberg, senior currency strategist in New York. This will give the ECB more leeway to raise rates, providing support for the euro.''
The Frankfurt-based central bank increased its benchmark rate to 3.75 percent last month, the seventh advance since late 2005, and left the door open for a further increase, supported by a combination of stronger Euro data.

In contrast to the service sector in the US, the service sector in the Eurozone actually saw faster growth in the month of March. Accelerated activity in France and Germany offset a mild decrease in Italian service sector activity. Germany also reported a sharp rise in factory orders due to some unusual demand for big ticket items. The only disappointment was in Eurozone retail sales, which fell victim to weaker spending.

Overall, the impact of the Value Added Tax on Germany and the Eurozone as a whole continues to be limited. This keeps a rate hike by the European Central Bank in play as ECB members continue to remain hawkish.

Traders have suggested that the central bank could raise its growth forecast. German industrial production is the only Eurozone release expected today.