The ECB’s governor signalled that the next move up in interest rate in Europe would come in March rather than February and did not reminded the markets on the ECB’s vigilance in the inflation front. These two apparently uneventful actions (advancing/postponing one month the course of action and missing a word from the speech-vigilance-) have broken one on the most stable asset relationships in the last 3 years: the pound/sterling exchange rate stability. From mid 2003 onwards the pound/sterling exchange rate has enjoyed a strong stability that has worked almost as an exchange rate band. From June 2003 to June 2004 the exchange rate variation has moved within a 10 % band. This band has subsequently been reduced to 8 % and gradually has come down later to 6 %. In the last 6 months of 2006 the pound/sterling exchange rate has moved within a 5 % band. If we compare this with the failed bands existing during the ERM (European Rate Mechanism), where the pound could move 2,5 % from central parity, the performance of the Pound/Euro exchange rate could be assessed as very successful. Not only did the UK has enjoyed exchange rate stability vis a vis the Euro but also it has enjoyed an independent monetary policy, two things that seemed contradictory at the times of the ERM. This new scenario triggered by the BoE and ECB actions might lead to some turmoil in the forex markets as it was exemplified last week: Thursday we saw the largest one day fall in the Euro/Pound exchange rate since mid 2004.

On the US front, last week has seen different Fed speakers reassuring the current Fed´s stance of no envisaged cuts in 2007. Don Kohn, Michael Moskow and Michael Fisher have all reassured the markets on the current stance of monetary policy. In the forex markets the dollar is benefiting from the US rate re-think. But also new solid data on the economic front (retail sales) and falling oil prices (helping lowering the US current account deficit) is pushing higher the dollar.

Last, Japanese monetary authorities position has remained contradictory in the last week. No one single voice is providing a good picture of what this week Bank of Japan(BoJ) meeting will deliver. A 25 basis points increase by the BoJ is expected by some forecasters though weak economic data in Japan does not support much this view. Even these forecasts are not helping a weak yen. The yen is currently vehicle for many carry trades, and these trades might be exacerbated given the current developments. The recent events outlined above seems to guarantee higher relative yields that might put further pressure on the yen.

These seemingly unrelated actions are now converging. Or so it seems given some rumours not heard since long time: there seems to be coordinated actions by Central Banks in the exchange rate markets. As reported by Bloomberg, traders said that Central Banks were buying the European currency. Unrelated events have led once again to the need of coordinated actions. We might see more volatility in the forex markets in the very next future.