Sterling held the middle ground this week. The Bank of England reduced UK interest rates by 0.25% which was as expected. The UK economy continues to suffer with weakening demand and continued disruption to the financial markets. UK manufacturing output fell in December which was contrary to expectations. However, inflation continues to exceed the target of 2.0% which makes rapid cuts in UK interest rates unlikely. The next UK interest rate reduction of 0.25% is being forecast for April.
Even though the economic news continues to be poor out of the US, the market view seems to be that the bad news is already in the exchange rate. The inter bank rate is US$1.941/£1. Hence we have seen gains for the US$ against both sterling and the Euro. I must admit I do wonder if all the bad news that may come out in the following months is fully priced in. The credit crunch still has a long way to run and we are only just seeing unemployment numbers increase as a US recession begins to bite. May still be better times to buy US$'s.
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