Overseas Real Estate Blog

Thanks to Richard at International IFX for this useful currency report:

With the Bank of England’s mortgage lenders rescue plan being the talk of the markets at the moment we have seen Sterling see-saw against the major currencies over the last week; in particular yesterday where we saw recovery in the second half of the session against the dollar.

Against the dollar, sterling fell just short of a new two week high. Nearer home versus the euro, sterling managed to fight its way back from above an all time low.

The Bank of England’s initiative to lend major mortgage lenders 50 billion pounds is aimed at kick starting new mortgage applications and stemming off repossessions. This effectively (for the time being) allows the MPC to look at interest rates solely to control inflation and keeping the economy afloat without having to get too involved in the housing market, a recent thorn in the side of the UK financial system.

Initially this was not seen as a positive move, however late yesterday traders began to see this as a more positive move for sterling following comments from Tim Besley regarding the UK housing market. Since December we have seen reductions of 75 basis points and there has been widespread speculation that the MPC would have to reduce rates further and more aggressively harming the currency’s yield appeal. However, without having to factor the housing market into the decisions, and with inflation above the target of 2 percent it is unlikely we will see dramatic interest rate cuts like those by the Federal Reserve in the US.

Sterling’s recovery versus the dollar could also be off the back of a euro/dollar rally which took the euro to another a new high as particularly positive comments from the European Central Bank boosted the single currency.

Traders said they saw strong demand for the euro after Yves Mersch, a member of the ECB’s governing council, said the central bank might revise its inflation target upwards and was surprised some analysts thought the ECB were considering future interest rate cuts.

One such analyst, Hans Redeker, at BNP Paribas, said he had adjusted his currency forecasts accordingly after seeing increasing signs that the ECB was flirting with the idea of raising rates

Later today we will see the release of the minutes of the BoE’s interest rate decision meeting earlier this month. It’s a fairly straightforward way to see how feelings lie with the bank’s nine policy makers. Markets will wait to see if the decision was a unanimous 9-0 decision to reduce rates or more divided vote, with some members preferring not to cut. The outcome may give some hints as to when the next rate cut, if any for the time being, will happen