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US$ Falls As Risk Aversion Spikes

The US$ fell overnight across the board as investors liquidated the greenback in an environment of increased anxiety. The assassination yesterday of Pakistan’s opposition leader Benazir Bhutto, highlighted the mounting geopolitical risks in the Middle East and the pressures facing the US as it attempts to manage the occupation of Iraq and the reemergence of Al Qaeda and the Taliban. With Pakistan a nuclear power, the market remains wary of the possibility of proliferation in the region and in turn the threat to the West. Adding to this level of geopolitical risk, is the continued pressure apparent in credit markets. As the credit crisis continues to develop, with many major global banks still likely to write-down significant portions of under performing sub-prime mortgages, individuals and institutions are unable to obtain credit. These tightened credit conditions continue to put pressure on the Fed to lower rates further in an effort to free up the supply of cash in the system. Adding to the woes from tightened credit markets is the ever-growing concerns about the overall health of the US economy. With continued weakness in the housing market, now seeming to spill over to other sectors of the US economy, many analysts are voicing concern that the US could push into a recessionary environment early next year. With this as a backdrop, analysts remain focused on the flow of US economic data. At 9:45 a.m., the Chicago PMI is slated for release, expected to register 51.7, while 10:00 a.m. sees the release of New Home Sales expected to register 717,000 a decline of 1.7%. This backdrop of increased risk has led to this steep US$ sell off over the past two days. While it is likely this trend will continue into year-end, there could be some signs of a respite over the last two trading days.

Thin Liquidity Helps to Depress US$

The US$ continued to weaken this morning following the release of weak economic data and after the apparent death of Pakistani opposition leader Benazir Bhutto in a suicide attack. The death of Bhutto adds a renewed element of geopolitical risk to the market as current president Musharaff seems to be holding on to power tenuously at best. It is important to remember that Pakistan is a nuclear power in the region. With this reintroduction of instability in the Middle East, traders have again opted to sell the US$, and move to the safe-haven of gold and oil. On an additional note of US$ weakness, the US released disappointing data this morning increasing the likelihood of a significant economic slowdown early next year. Mortgage applications fell 7.6%, pointing to continued weakness in the housing sector. This report comes a day after S&P Schilling released data showing home prices fell to the lowest levels since 1991. In addition, Durable Goods orders registered a paltry gain of 0.1% vs. 2.0% forecast and ex-transports fell 0.7% vs. an expected gain of 0.5%. Consumer Confidence is to be released at 10:00 a.m. and expected to decline to 86.5 vs. 87.3 registered last month. With the US economy slowing and credit remaining tight, the market continues to speculate that the Fed will cut rates when it meets in January. This environment of lower rates, impending economic slowdown and heightened geopolitical risk seems to be weighing on the US$ over the final trading days of 2007.

The euro continues to benefit as traders shift assets into the common currency amidst a US economic slowdown and the apparent divergence in rates between the US and Eurozone. It is expected that the US housing market, paced by continual fallout from the sub prime housing debacle and the affect on credit markets will force the US Fed to lower rates early in 2008. This view is in stark contrast to the ECB that will likely be hiking rates early next year as it works to avert mounting inflation pressures.

The yen remains under pressure as the market looks to low Japanese interest rates and the continued use of the carry trade to apply pressure on the currency. This trend is likely to continue for some time as the market has all but discounted the chance that the Japanese will hike rates at any time in the near future.

The pound continues to gain some traction, as traders remain focused on the apparent rebound in the UK economy. It seems that UK retail sales are poised to register significant gains this holiday season as home mortgage approvals have rebounded. The market has recently forecast that the subprime lending debacle would lead to a significant slowdown in the UK economy and further rate cuts from the Bank of England. However, this morning’s reports might keep the BOE sidelined for some time and lead to a sterling recovery.

US$ Holds In Ranges

The US$ was slightly better overnight ahead of data released in the U.S. The final release of third quarter GDP was expected to show growth in the U.S. rose 4.9%, compared with second quarter growth of 3.8% and first quarter growth of 0.6%. This data has been largely ignored by the market, which instead focuses on the current credit crisis and projections for slower economic growth moving forward. In addition, the core PCE (personal consumption expenditure) was released. The number showed an increase of 2.0%, up from previous estimates of 1.8%. As a measure of inflation, this number will continue to stoke concerns that the Federal Reserve will have to deal with stagflation within the U.S. economy, making future policy moves increasingly difficult.

The euro is staying largely within these new lower ranges as liquidity thins ahead of global holidays and the end of year. The market seems to have largely finished squaring positions and taking profits, leaving the currency to move directionless with small flows. The condition is likely to be amplified by ever-thinning liquidity. The European Central Bank remains hands-on in the money market, lending and then draining funds from the interbank market on a day-to-day basis. These moves are an effort to restore confidence and bring actual lending rates near the Bank’s target rate of 4.00%. Thus far, the moves have had limited impact as the euro Libor rate is 79 basis points above the Bank’s target rate, up from 26 basis points higher in July. A higher rate above the Bank’s target signifies tighter credit conditions, as banks demand higher interest in order to lend to other banks.

The yen is slightly higher against the US$ as investors keep using it as a measure of risk within the overall market. In the near term, the yen will continue to float with investor sentiment, depreciating when investors become confident while appreciating when investors become less confident. With Japanese interest rates low and remaining there for the medium term, the carry trade will remain appealing in calmer markets. The prime beneficiaries of the carry will be those with wide interest rate differentials compared to Japan, particularly among those countries where interest rates are likely to remain steady while global banks increasingly cut rates. This is likely to remain supportive of the antipodean currencies of Australian and New Zealand.

Sterling continues to decline broadly as the market adjusts from the Bank of England’s recent interest rate cut. Sterling has recently broken below its yearly up trend, which is used within the market as a prediction of further declines. However, into the end of the year, holidays and think liquidity is likely to keep the pound range-bound. Broadly, the pound will continue to decline should the Bank of England decide to cut interest rates further. Conversely, if it shows that the interest rate cut in December was a preemptive move to keep the U.K. banking sector afloat, sterling will become firm.

US$ Gains As Market Continues to Unwind Positions

The US$ gained overnight as the market continues to adjust positions ahead of year-end. With credit concerns continuing to weigh on markets, traders continue to gauge the response from global Central Banks and attempt to time any future interest rate policy actions. The Fed, ECB and Bank of England have all recently flooded money markets with an abundance of cash in order to prevent any significant liquidity issues as corporate year-end funding requirements arise. The effect has been a scaling lower of interest rates in each of these economic areas. As Central Bankers continues to take significant steps in order to sure up credit markets and keep liquidity in the banking system, the market’s focus has shifted to the fallout from these woes. US investment banking giant Morgan Stanley posted its first ever quarterly loss of 3.56 billion after taking write downs of some $9.4 billion related to sub prime exposure. These write downs will likely continue well into the first quarter of next year, suggesting that there could be further strain on global credit markets as the housing slump continues. Putting additional pressure on US housing markets was the release of a report showing that mortgage applications fell 19.5% last month as credit markets remain tight. Expect volatility in markets to continue to ease as traders wind the year down. However, any additional shock to credit markets could lead to resumed US$ weakness.

The euro continues to consolidate in recent ranges as the market remains pulled in opposing directions by differing sets of data. The ECB has recently flooded money markets with a record cash infusion of some $65 billion euro. The aim of this cash prop was to offer the market some assistance as credit woes continue to tighten lending patterns and push LIBOR borrowing rates higher. With this cash injection, LIBOR rates have effectively dropped, making year-end borrowing more affordable and accessible to Eurozone corporations. These tightened credit markets have seemingly harmed Eurozone corporate confidence. The German Ifo survey measuring business confidence declined to 103.0 from 104.2 in December pointing to further concerns moving forward. However, with inflation pressures rising, as energy prices remain high, the ECB seems intent to push rates higher in the near term. This view was reinforced by ECB Chief Trichet overnight stating that the Bank remains poised “to counter the upside risks to price stability.” With recent action in credit markets though, it remains likely that the ECB will wait to the middle of next quarter before any such rate hike. The result will be a continued plodding in recent ranges.

The yen gained modestly overnight as traders again unwind the “carry trade” as market risk appears to be reemerging attached to credit markets following the disappointing earnings news from Morgan Stanley. With global credit markets seemingly still under pressure, traders are again becoming risk adverse and shifting assets away from yen financed positions and back to higher yielding “cash assets.” This trend could continue into year-end providing the yen a further modest boost, but ultimately low Japanese interest rates and a soft economy will push the yen lower yet again.

The pound fell overnight following the release of minutes from the Bank of England’s last policy meeting. At this meeting the BOE surprised the market with a 25 basis point rate cut, as they cited tightened credit markets and weakness in housing. This vote was the first unanimous vote by the Central Bank to cut rates since the attacks of September 11th. Furthermore it seems the Bank debated a larger rate cut, but expressed worries about the possibility of inflation pressures and deiced against it. This seeming unified stance to cut rates, signals to the market that there will be further rate cuts in early 2008, which will all but certainly weigh on sterling.

US$ Slightly Lower, But Steady Into End of Year

The US$ fell modestly overnight despite the rout on Wall Street yesterday, as traders continue to square positions ahead of year-end. The market remains uncertain about the course of US interest rate policy and to the extent of further rate cuts from the Central Bank. With data last week, revealing an uptick in US inflation pressures, the market has moderated its view about the extent of any further rate cuts from the Fed. However, the overall worry hanging over the market is the prospect of the US economy slipping into recession early in 2008. With the US housing market remaining under pressure and the sub-prime lending debacle overhanging credit markets, there is significant concern that the US consumer will be forced to moderate spending habits. It already seems apparent that this holiday season will reveal a weakened retail sector. These expectations of slowing growth have led the market to price in an 88.0% chance that the Fed will cuts rates 25 basis points at its January 30th meeting. The US released housing starts data this morning revealing a slowdown to 1.187 million from 1.229 million last month. Building permits were released in line with expectations at 1.152 million. There is no other data slated for release today, so expect traders to remain focused on illiquid market conditions, mounting worries about an impending US recession, interest rate expectations and year-end positions squaring.

The euro gained modestly overnight as the currency’s selloff appears to have bottomed and position squaring has moderated. As traders will likely focus on the growing interest rate divide between the US and the Eurozone, the euro will likely soon again gain traction. Eurozone officials have indicated that they remain focused on curbing inflation pressures as growth accelerates. A chorus of ECB officials has all but indicated that they intend to hike rates, perhaps as soon as their meeting on January 10th, in an effort to stem these price pressures. This view is in stark contrast to the Fed, which will likely cut rates again at its next meeting as it works to stave off what appears to be an impending US recession. Overall in the longer term, this view should support the euro and ultimately drive it higher.

The yen remains under pressure as the “carry trade” appears to have reentered the market and capital flows weigh on the Japanese currency. As equity markets appear poised to rebound from yesterday’s selloff, traders have again shorted the yen for use as a financing vehicle through the “carry trade” to assist in repurchasing these equity positions. In addition, the Japanese currency remains weighted down by the country’s historically low interest rates and the affect on the Japanese investor. These low rates have led to a search for higher yields beyond Japan, leading to a continued capital shift. One favored currency being used as a counter to the weakened yen is the Aussie and it offers considerably higher yields. Expect this trend of the “carry trade” and low interest rates to keep the yen under pressure for some time.

The pound fell overnight after the release of a report showing that UK consumer prices gained less than forecast, registering a gain of 2.1% vs. an expected 2.3% gain. This data helped reignite the market’s expectations that the Bank of England could again shift rates lower in early 2008. With declines in housing pacing worries about a drop in consumer spending as credit markets tighten, there is a growing belief that the BOE could again drop rates in an effort to stimulate economic growth. The only hindrance to this policy shift would be inflation pressures, which now seem to be moderating. Expect these shifting expectations about BOE policy to ultimately steer the pound over the next few months.

US$ Continues to Rally as Fed Rate Cut Expectations are Pared

The US$ continues to rally as the market adjusts positions into the year-end as interest rate expectations within the US$ continue to adjust. Last week the Fed surprised the market with a modest 25 basis point rate cut, less than the 50 basis points some in the market had forecast. This policy stance came prior to the release of both PPI and CPI data, pointing to a surprising gain in inflation pressures. This has led the market to temper its view about the scope of further rate cuts from the Fed in 2008. This seeming shift in interest rates helped bolster the US$ and provide further impetus to the market to square short US$ positions. Expect this trend of US$ strength to permeate the market through the early part of this week as position squaring continues ahead of year-end next week and with the approaching Christmas and New Year holidays. The US releases limited data this week, with most of the market moving releases scheduled for today. The US current account balance fell modestly to a deficit of $178.5 billion from $183.0 billion, in addition total foreign investment in US assets surged, registering $97.8 billion in October vs. $30.0 billion forecast. Both of these figures show a modest a recovery in foreign confidence in the US$ and should help underpin the greenback’s recent action. Housing Starts, GDP and Personal Consumption are also slated for release this week and could modestly shift US$ direction. Overall, expect trade to be ultimately determined as investors shift positions into year-end.

The euro remains under modest pressure as investors vacate long-held euro positions, booking profits as year-end approaches and also selling the Eurozone currency as interest rate expectations shift. With the ECB all but certain to hike rates early in 2008, the market has shifted its attention to the Fed, who now appears to be treading cautiously towards further rate cuts in 2008. With the seeming narrowing of interest rates between the US and Eurozone now on hold, the market has taken this opportunity to shed long euro positions. This trend will likely continue into early 2008, as a clearer picture surrounding interest rates emerge.

The yen fell modestly overnight, remaining under pressure as investors focus on continuing to use the Japanese currency to finance positions across other markets. With the US$ surging across the board, the greenback extended its gains against the yen. This trend of yen weakness will likely continue into year-end, as it remains unlikely that traders will cease using the currency through the “carry trade.” With yen weakness as a continued backdrop, only a seeming shift in Japanese interest rate policy could shift investor sentiment away from selling the yen.

The pound fell modestly overnight as US$ strength continues to extend across all markets. With investor’s remaining uncertain about the scope of further interest rate cuts from the US Fed, Bank of England policy has come sharply into focus. A mixed bag of economic data in the UK, showing surprising gains in price pressures at the same time that the housing market and consumer spending is slowing, will likely keep the Bank of England from shifting interest rate policy anytime in the near future. After the BOE surprised the market with a rate cut earlier this month, some traders had expected rate policy to shift to a dovish perspective. However, continued uncertainty about inflation expectations will likely keep the BOE steady. This uncertain view towards policy will likely keep the pound’s fortunes tied to overall US$ direction.

US$ Higher As Profit-Taking Accelerates

The US$ surged overnight as year-end profit-taking, coupled with reduced bets surrounding the scope of further US rate cuts helped spur the greenback higher. As traders have remained short the greenback throughout the course of this year, they are now taking the opportunity to book some profits on these long held positions. Further helping the US$ has been increased interest in cross border investment by foreign entities. This was reinforced overnight by the announcement that Lufthansa was purchasing a $300 million stake in JetBlue airlines. As the US$ remains weak, and US companies have come under renewed stress amidst recent turmoil in credit markets, foreign entities will continue to look to the US economy for cheap investment opportunities. These investments in turn create a renewed demand for the US$. Further helping the greenback push upward has been the reduction in expectations of the scope of further rate cuts by the Fed. After the release of yesterday’s PPI report, showing that inflation pressures surged during the month of November, investors scaled back their belief that the Fed will aggressively cut rates early into next year. The market has reduced to 49.0% from 65.0%, the probability that the Fed will cut 50 basis points in the first quarter to reflect these revised inflation expectations. Earlier this morning CPI data was released at a higher than expected 0.8% vs. expectations of a 0.6% reading, while year on year data registered a gain of 4.3% vs. expectations of a 4.1% reading. At 9:15 a.m. Industrial production and Capacity utilization data is to be released expected to register 0.2% and 81.7 respectively. Any signs of improvement in this data could lead the market to continue to push the US$ higher.

The euro dropped overnight as profit-taking dominated the currency pair amidst a surge in US inflation readings, prompting investors to scale back interest rate expectations between the US and Eurozone. However, these US$ gains could ultimately be limited as ECB policy makers continue to stress their concerns surrounding mounting inflation pressures. Overnight ECB policy maker, Yves Mersh asserted that the Bank, “will act in a reolute and timely manner” to “prevent upside risks to price stability.” These comments all but signal that the ECB will push rates higher early in the first quarter of 2008. The market’s focus will remain on the US Fed as traders try to gauge how much further US rates will fall in 2008. The scope of this rate divergence will ultimately steer this currency pair.

The yen fell this morning as US$ strength permeates the market. As traders focus on diminished expectations surrounding the prospect and scope of further rate cuts from the US Central Bank, trader seem to be squaring short US$ positions and selling yen. Also weighing on the Japanese currency was the release of a weaker than expected Tankan survey of manufacturing confidence. The report fell to 19 in December form a 23 reading in September, making it more difficult for the Bank of Japan to justify a rate cut in the first quarter of 2008 as confidence wanes. Many traders had expected the BOJ to hike rates before its current Chief Fukui departs office. However, further yen losses will likely be contained today, as US equity markets will likely come under pressure as increased inflation pressures lead traders to refine the US interest rate outlook. Any drop in equities could prompt an unwinding of the carry trade, which will ultimately translate to yen strength. Expect these dueling factors to steer the yen in wide ranges over the coming weeks.

The pound fell overnight as profit taking dominates the market as uncertainty surrounding interest rate expectations steer trade. As the scope of further Fed rate cuts is now being questioned by the market, Bank of Engalnd policy ahs come into focus. Slowing economic growth coupled with the lingering fallout from the credit crisis has helped put sterling under pressure. However on the converse is the rising threat posed by inflation making the Bank of England's policy stance uncertain. Expect these conflicting factors to keep the pound trading in wide ranges.

US$ Trading in the Same Ranges, Equities Indicate a Lower Open

The US$ diverged in direction overnight, gaining modestly against the pound and euro, while slumping against the yen. The market’s attention remains solely on credit markets and the affect they will have on Federal Reserve interest rate policy and the overall health of the US economy into 2008. As these credit market woes continue to underscore all markets, several US banks have announced that they are putting aside additional reserves to offset losses in their mortgage portfolios. Bank of America, the second largest bank in the US, announced overnight that loan losses would increase in 2008. At the same time, another large US banking institution, Wachovia, announced that it would more than doubled its loan loss provision as it expects losses to continue to mount. This increasingly weakening position of banks’ credit portfolios has caused credit markets to tighten significantly. As a result, the Fed took the unorthodox action of injecting some $40 billion in cash into global money markets through and advanced currency swap operation. While this action could help alleviate the expected year-end cash crunch as banks need to sure up balance sheets, it underscores the lack of confidence the market continues to exhibit towards overall Federal Reserve policy and the Bank’s reaction to eroding market conditions. The market has all but priced in a 25 basis point rate cut from the Fed at its next meeting at the end of January 2008, however, worries are mounting that any such rate cut is unlikely to prevent a recession next year. These worries about an impending market slowdown and going credit market problems have been exacerbated by the seeming reemergence of inflation pressures. The US released higher than expected PPI data this morning gaining 3.2% vs. 1.5% expected (this puts PPI year on year expansion now at 7.2%.) In addition, retail sales were released at a better than expected 1.2% vs. an expected gain of 0.6%. It is unlikely such robust sales numbers will continue in December as holiday figures are failing to meet expectations. With these gains in inflation continuing to register, the Bernanke Fed will continue to paint itself into a corner. The previous policy statement warned about inflation pressures, moderating the rate cut to 25 basis points vs. the 50 basis points some in the market had hoped for. If the current trend of slowing economic growth coupled with mounting inflation pressures continues, whispers should soon emerge about the US economy entering a period of stagflation. This will certainly weigh on the US$ in the coming months.

The euro appears to have settled into ranges as traders continue to speculate about the health of global credit markets and the direction of global central bank policy. The euro has benefited from the ECB maintaining a steady policy surrounding interest rates aimed at containing rising inflation pressures in an environment of surging economic growth. This view is being contrasted with the US Fed, who is likely to continue cutting interest rates well into 2008. This diverging interest rate view will certainly continue to support the euro well into next year.

The yen continues to trade in ranges defined by the market’s use of the “carry trade.” With equity markets seemingly stabilizing yesterday after the Fed’s currency swap announcement, investors again took the opportunity to renter short, “carry trade” influenced yen positions. In addition, concerns that Japanese manufacturing confidence is eroding, also seems to be weighing on the yen. The quarterly Tankan report scheduled for release tomorrow will likely show that confidence has declined for the first time since March of this year. However, these yen losses could be tempered as Japanese exporters repatriate profits at these much more appealing levels. In addition, the Bank of Japan announced that it would add significant liquidity to the banking system at year-end in an effort to offset any sub prime issues Japanese banks might suffer. This action comes as BOJ Deputy Governor Iwata announced that the Japanese banking sector would be able to withstand the current sub prime washout and ensuing credit difficulties. With these dueling factors in place expected the yen to continue to trade in wide ranges.

The pound slipped modestly overnight on signs of the US$ posting some gains overnight. However, these sterling losses could ultimately be limited as a report released overnight showed that inflation expectations continue to rise in the UK. The Bank of England released a report overnight showing that consumer prices are expected to rise 3.0% next year. This gain in prices will limit the BOE’s ability to cut rates again in an effort to stimulate growth amidst signs of an economic slowdown and credit market turmoil. The BOE surprised the market earlier this month with a 25 basis point cut as it looked to offset signs of weakness in the UK economy. However, this morning’s data will certainly keep rates on hold for some time, ultimately bolstering the pound.

US$ Volatility Increases As Fed Adds Massive Liquidity

The US$ diverged in direction overnight erasing yesterday’s movements, as the market again remains focused on the US Federal Reserve. The Fed cut interest rates 25 basis points yesterday to 4.25% in a move widely expected. However, the market was hoping that the Fed would surprise the market with a 50 basis point cut. There is a growing concern amongst many in the market that the Fed’s action yesterday was not enough to stabilize markets in light of recent credit conditions. As year-end funding requirements continue to weigh on the availability of credit, the spread between the Fed Funds rate and the LIBOR rate continues to widen. The LIBOR rate represents the rate at which banks are able to borrow from each other in the market place. With the Fed seemingly ignoring the cost of credit to financial institutions, yesterday’s rate cuts will likely have little affect on the current situation. The market had hoped that the Fed would aggressively slash the Discount rate along with the Fed Funds rate to create a healthier credit environment. As markets sold off yesterday, the Fed seems to have reevaluated its position and the extent of its policy actions. Rumors leaked into the market this morning, seem to suggest that the Fed is prepared to take further action in the markets to ease the current credit conditions. What these actions will be still remain undisclosed, however, the market seems to be acting with some confidence that condition will be eased. However, a bigger problem continues to overhang markets and that surrounds market confidence directed at the Fed. As the Fed continues to ignore the threat of recession and credit market woes, investor confidence continues to wane. This has been reflected in the value of the US$ this year and will likely continue to steer markets. The flow of US economic data continues to remain uncertain, with traders remaining focused on the mounting threat of recession early in 2008. Trade Balance figures were released in line with expectations registering a deficit of $57.8 billion vs. $57.4 billion expected. However, Import Prices rose slightly to 2.7% vs. 2.0% expected. These signals of mounting price pressures could keep the Fed further pigeon holed towards interest rate policy as inflation gains are being registered in an environment of slowing growth. With this apparent economic situation developing, the term stagflation will likely begin to be bantered in the market. Overall economic developments will likely do little to bolster the US$ in the short-term.

The euro recovered overnight following yesterday’s losses after the Federal Reserve’s decision to cut rates 25 basis points. While this rate cut was in line with expectations, the cut was less than some analysts had forecast, and ultimately disappointed the market. With interest rates narrowing between the Eurozone and US, yseterday’s rate cut further drove this point home, ultimately making the euro more appealing. The short-term slide in the euro, was symptomatic of the cut not being as far reaching as many in the market had hoped, and helped alleviate some pressure on the US$, albeit in the short run. The market will ultimately remained focused on the diverging policy positions between the Fed and ECB. With the Eurozone poised to hike rates early next year as it aims to combat inflation pressures, the Fed’s policy position will come sharply into focus. This environment of lower US rates, contrasted with a proactive ECB will weigh on the US$.

The yen fell this morning following revised comments form the Fed, that the US Central Bank is poised to take further action to ease recent credit conditions. These rumors appear to have reversed the course of US equity markets and reignited the “carry trade.” With the “carry trade” investors short the yen and use the proceeds to by higher yielding assets, typically equities. In current market conditions, the correlation between the direction of the US S&P Stock Index and the direction of the yen is near 90.0%. Expect this tightly correlated trading pattern to continue for some time, as the yen is unlikely to shed its position as a favored financing mechanism.

The pound rallied this morning as the market seemingly digests the policy action taken by the Federal Reserve yesterday and focuses on the diverging economic situation within the UK. With an uncertain inflationary outlook in the UK, as evidenced by the surge in manufacturing prices registered earlier this week, the market remains focused on contrasting interest rate policy positions between the US and UK. The Bank of England will likely hold rate steady into early 2008, as this uncertain inflationary environment will likely keep the Central Bank from pushing rates lower in the near term. Expect this seeming diverging policy focus between the two Central banks to bolster the pound.

Fed Fund Probabilities for the Meeting Today

                        Current            Week Ago        Month Ago

No Cut -          2.1%                 5.1%                 38.9%

25 BP Cut -      67.8%               57.5%               34.8%

50 BP Cut -      30.1%               29.7%               15.7%