• US politics ‘gridlocked’
• Bank of England starts ‘Interest rate hiking’ meeting

Market overview

If you hear a loud ‘Quack’ emanating from west of the Atlantic, don’t panic; it’ll just be lame duck GW Bush who is now unable to press any policy through because the Democrats won control of the House of Representatives for the first time in 12 years last night. The markets had been harping on about how no politics is good politics particularly after so many years under GW’s control but the US Dollar hasn’t strengthened on the mid term election moves. You will be either delighted or bemused to hear that Arnold Schwarzenegger was re-elected and many will be ambivalent as to the outcome. Nevertheless, TV news channels are determined to drive US politics through our veins and have seemingly ignored the other news. That’ll be a relief to G Brown and T Blair who are both likely to be interviewed in the cash for honours police investigation. It’ll frustrate Southend fans (pronounced ‘Sarfen innit’) after their teams 1-0 victory over Manchester United despite Man U fielding 10 international players. However, it won’t obscure the fact that the Bank of England starts its two day meeting today and the majority of traders are still convinced that the BoE will raise the mortgage rate by a quarter of one percent tomorrow. Sterling is riding high on this expectation and this level of strength is likely to remain in place after yesterday’s upbeat UK retail sales numbers. Other than this news, we could well have a quiet day with little data to trouble the scorers. I hope your is relatively ‘US politics’ free.

If you're migrating - A little more detail

Overnight the Reserve Bank of Australia did as expected and raised the cost of borrowing in Australia by 0.25 percent in order to damp down consumer ebullience. This is likely to be the last interest rate hike for the time being and it may be six or even nine months before we see another move from the RBA. The flip side of damping consumer demand is that higher interest rates will attract more overseas investors to buy Aussie Dollars for the improved yield. As mentioned many times in this and other columns, carry trades are specifically carried out for this purpose, where funds are borrowed in Japan at virtually zero interest rates and invested in higher yielding economies like Australia (now 6.25%) and New Zealand (7.25%). Understandably, this increases demand for these currencies and they strengthen. This hasn’t yet happened to the Aussie Dollar because the markets had already priced in the widely expected hike but there will be some pressure in the coming days. The only question is whether this is counterbalanced by a UK interest rate hike and secondly, the concern over ‘if and where’ Aussie interest rates might move next. It’ll be business as usual for GBPAUD then, a lot of volatility and plenty of chances for buyers and sellers, although buyers should not be targeting anything higher than A$2.48 and sellers would do well to look for A$2.45.

If you're buying property overseas - A little more detail

Expectations of a hike in the UK base rate are keeping Sterling very well supported and that is offering great Euro buying levels for UK based European property buyers. Will it last or will it improve or will it all fall about our ears? These questions are being asked by everyone and the answers are all offered with a host of caveats because this really isn’t a clear picture at all. GBPEUR is testing the top end of its range but it has been doing so for a few weeks now. I am still convinced that €1.50 will hold and that the path for this pair is downward. The every time GBPEUR tests up towards this level and fails is another nail in the coffin for this pair and chartists will be drawing lines downward to €1.4660 or so for their traders to target. This represents a significant Fibonacci retracement level and should be tried even if the upward trend continues. However, if this level breaks €1.4600 and €1.45 offer further support but a fall to these levels would suggest that the upward trend is failing. The catalyst for that move may well be a change in tone from the Bank of England or ‘heaven forefend’ the BoE leaving interest rates on hold but stranger things have happened.

Thought for the day

It just means gridlock. Whenever our beloved elected leaders are handcuffed, the markets tend to do all right.
Art Cashin

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FX Research and Analysis undertaken by:
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