British Pound: Possible Rate Cut in 2008 (page 1 of 2)

DailyFX Fundamentals 11-14-07

By Kathy Lien, Chief Strategist of DailyFX.com

Bernanke: Getting More Serious About Inflation

Ben Bernanke is making major changes at the Federal Reserve, ones that will probably be apart of his legacy. According to Bernanke's speech this morning about changing FOMC communications, the Fed will be looking at the "overall inflation rate" to determine whether they have met their mandated objectives of maximum employment and price stability. Although they stopped short of announcing an actual inflation target, the fact that they will be publishing their projections for overall inflation and core inflation 3 years forwarded and updating them quarterly instead of biannually indicates that at least internally they have an inflation target. To the market, this can be considered inflation targeting lite. Bernanke also pointed out the importance of using the entire inflation rate and not just the core rate in determining the current level of price stability. This tells us that they Federal Reserve really doesn't want to lower interest rates even though last week the Fed Chairman warned that the downside risks to growth far outweigh the upside risks to inflation. The changes made today also confirm that the US has a central bank that prefers tighter over looser monetary policy. Even though the US dollar has strengthened slightly following these changes, they are not groundbreaking enough to cause a big move in the currency markets because we all already know that Bernanke earned his nickname printing press Ben years ago. Retail sales and producer prices were equally unsatisfying. Retail sales rose more than expected last month but consumer spending growth slowed materially when compared to the prior month. Monthly producer price growth was weaker than expected, but the annualized pace of growth rose to a 2 year high and interestingly enough the increase was driven primarily by the rise in food and not energy prices. This means that we should see the contribution of higher energy costs in the November numbers. Tomorrow we are expecting US consumer prices along with the Empire State and Philly Fed manufacturing surveys. We are still looking for stronger numbers overall which should be dollar positive.

British Pound: Possible Rate Cut in 2008

The British pound was the only high yielding currency pair to not rally against the US dollar today. Fundamental and technical factors are calling for major losses in the British pound. To the surprise of the market, the Bank of England's Quarterly Inflation report revealed a central bank that is still struggling to balance weaker growth with stronger inflation. They revised their 2008 GDP forecasts from 2.7 percent down to 2.4 percent which is a big change and warned that they expect the inflation rate to rise above their 2 percent target next year before falling back below it in 2009. The uncertainties surrounding inflation and growth are both increasing leading Bank of England Governor King to forecast more difficult times ahead. Over the past few weeks, UK economic data has revealed cracks in the economy prompting some traders to call for an interest rates cut by the Bank of England in the first quarter of next year. Meanwhile the labor market remains tight with the unemployment rate at a 2.5 year low which suggests that retail sales tomorrow could surprise to the upside.

Euro Struggling to Stay Afloat

The Euro is struggling to stay afloat despite stronger economic data. GDP growth in the third quarter rose to 0.7 percent, which was slightly higher than the market's expectations.