Sterling drops to record low!

Thursday, December 27, 2007
Sterling dropped to a record low versus the euro on concern that the Bank of England may lower its interest rates again in the beginning of next year. The greenback is soft across the board as momentum market participants took profits.

The BOE rate cut speculation arose last week when the Bank of England released its December monetary policy meeting minutes, which showed a unanimous vote for a 25-bp rate cut this month. Also, the bank heightened the impact of recent financial market turmoil and the consequent credit market tightness on the economy and inflation. The BOE and Fed are both likely to have a couple of rate cuts in the coming year, which weigh on their currencies.

In contrast, the European Central Bank may keep its benchmark rate unchanged. The euro rose to 0.7311 versus the sterling, and tested a resistance level at 1.45 against the dollar.

Financial markets in Australia, Hong Kong and the UK are closed for the Boxing Day. Currency trading will remain very light towards the end of this year.

Tomorrow will see US durable goods orders report, weekly job report and consumer confidence. Durable goods orders are seen to rise 2.0% in November, compared with a 0.2% decline in the previous month. Core durable goods orders are likely to increase 0.3%, versus a prior month¡¯s reading of ¨C0.4%. Weekly initial claims are expected to change from 346k to 342k. US consumer confidence is estimated to fell from 87.3 to 86.5.

EURUSD will face interim resistance at 1.45, followed by 1.4530 and 1.4550. Additional ceilings will emerge at 1.4580, backed by 1.46. Support starts at 1.4470, backed by 1.4430, 1.44 and 1.4380. Subsequent floors are eyed at 1.4350.

GBPUSD encounters interim resistance at 1.98, backed by 1.9850 and 1.9870. Subsequent ceilings will emerge at 1.99, followed by 1.9930 and 1.9980. On the downside, support begins at 1.9760, followed by 1.9730 and 1.97. Additional floors are eyed at 1.9670, backed by 1.9650 and 1.9620.

USDJPY encounters interim resistance at 114.50, backed by 114.80 and 115. Subsequent ceilings will emerge at 115.30, followed by 115.50 and 116. On the downside, support begins at 114.20 and 114, followed by 113.80. Additional floors are eyed at 113.50, backed by 113.20 and 113.