Foreign Currency Report 29 September 06

Sterling has fallen to two-week lows against the euro and the dollar this morning, extending losses after dovish comments from a Bank of England policymaker and downward revisions to second quarter growth earlier in the week.

On the back of revised inflation stats from the Office of National Statistics (ONS) Monetary Policy Committee member David Blanchflower said on Wednesday inflationary expectations had levelled off.
The Office for National Statistics revised down the quarterly GDP growth rate in April to June to 0.7 percent from 0.8 percent. The GDP deflator, an inflation gauge, was also revised down.

Blanchflower's comments together with the data have cast a shadow of doubt over the likelihood of a BoE interest rate hike to 5 percent in November.

However the Bank of England's (BOE) summer interest rate rise appears to have failed to cool the housing market which could result in further hikes. In addition UK's John Lewis said that sales in its department stores rose 8.1 percent in the week to Sept. 23 compared to the same period last year.

However with the adjusted inflation figures and dovish comments any hike could be more distant than first thought. Most investors see rates on hold at 4.75 percent at BoE's meeting next week.

In contrast to the UK, expectations of two more rate hikes in the euro zone this year -- the next one likely next week -- have been supported by a run of hawkish comments from European Central Bank policymakers.
European inflation data is due out this morning at 10am, in addition there are US consumer spending figures out today which could result in volatile trading on this last Friday of the month.