Recession looms
Finotec | Jul 09, 2008 08:00PM ET
Bank of England Governor Mervyn King will have little choice other than to stand by and watch as the U.K. edges closer to recession. Inflation accelerated to the fastest pace in more than a decade in May, making it harder for King to cut the interest rate and help an economy threatened by falling house prices, record oil costs and tight credit. Policy makers will probably leave the key rate at 5 percent today, according to most traders and economists. Inflation accelerated to 3.3 percent in May, exceeding the government's upper 3 percent limit for only the second time in a decade. At the same time, surveys show services and manufacturing industries contracted in June, billionaire investor George Soros says a recession is ``likely'' and Lehman Brothers Holdings Inc. says the economy may start to contract this quarter. GBP/USD currently trading at 1.9775 as 7:51 am, GMT.
The dollar was little changed against the euro before Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry Paulson address U.S. lawmakers on their response to widening credit-market losses. ``Bernanke may mention the downside risk of the U.S. economy,'' said Masafumi Yamamoto, head of foreign-exchange strategy in Tokyo at Royal Bank of Scotland Group Plc, the world's fifth-largest currency trader. ``That would reduce expectations of the Fed's rate increases this year and be a catalyst for dollar-selling.'' The dollar has fallen 11 percent against the euro since September, when the Fed made the first of seven reductions in its target lending rate to avert a recession. Futures contracts on the Chicago Board of Trade show the odds that policy makers will keep borrowing costs unchanged this year rose to 32 percent from 7 percent a month ago. EUR/USD currently at 1.5731 as of 8:04 am, GMT.
The euro may rise to $1.5909 against the dollar should it stay above its five-day moving average, said Masashi Hashimoto, a senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. The five-day moving average, currently at $1.5715, will provide a level of so-called support for the euro, Tokyo-based Hashimoto said, citing technical charts traders use to predict price movements. The target of $1.5909 will match a two-month high set by Europe's single currency on July 3. Support is an area where buy orders may be clustered.
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