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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Chip McVickar who wrote (1431)	3/24/1999 6:54:00 PM
From: Marc Porsser	Respond to of 3536

Can't Keep Sterling Down? by MG analyst Ashraf Laidi Reprinted with the permission of www.forexnews.com British politicians and central bankers were both pleased with today's inflation figure. UK Retail prices index excluding mortgages (RPIX), the nation's official inflation measure, rose by 2.4% in February, its lowest since November 1994. It was in November of last year when the 2.5% inflation target was last met, before showing a 2.6% rise in December and January. Sterling's reaction was quite expected as the currency dropped 40 pips against the dollar and by a little bit less against the euro. About six hours later however, Cable posted a 160-pip rally, reaching a 3-week high of $1.6381, and an 8-day high against the euro at 0.6654 GBP. Those who were bearish on sterling during following the inflation news had better closed their positions, or they would have been burnt by a North Sea Oil flame. What may have been the reason to such a rally? Looking through the avalanche of "expert" daily reports on FX markets, none has explained, or even acknowledged the move in the sterling. Here are some of our explanations. The low inflation figure gives a clear green light for the Bank to loosen interest rates and lead the nation into a desperately needed recovery. Yesterday's downward revision in Q4 GDP growth to 1.10% from 1.3% clearly highlighted that need. This is therefore, the long-term explanation to the sterling's rally, using economic growth as the ultimate effect, rather than that of short-term capital outflows from the currency in the event of a rate cut. Moreover, the 2.4% inflation figure was very much welcomed by the Central Bank, which had previously been torn between having to stem an out-of-hand inflation (RPIX exceeded target at 2.6% in December and January), and having to deliver an interest and exchange rate-based recovery. The Bank was therefore under pressure from both the government-to meet the sacred inflation goal, and from exporters-to lower the pound. The rising currency therefore, cheered this event by interpreting the MPC as having more room to bring economic growth. A more political reason to today's pound rally is the threat of a NATO-backed military attack on Kosovo. The pound's status as a safe-haven currency came into play, especially at an instance when an attack seemed most imminent. Also on a political basis, is the inevitable rise in oil prices. OPEC finally signed the much-anticipated agreement to cut oil production by 1.7 million barrels/day or 7.0% of daily supplies in an effort to boost prices. The effectiveness of the agreement stems from the fact that even non-OPEC members such as Mexico, Norway, Oman and Russia agreed to cut supplies by more than 2.1 million barrels/day. Lower supplies will be in effect in April. The good news for prices is that even if OPEC delivers only 75% of the aforementioned cuts, prices will move up. UK Brent prices rose to $13.74 barrel/day, while analysts are targeting prices to reach the psychological $15 barrel/day. The impact on sterling is therefore straightforward. -March 23, 1999