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GBPCHF

The BritishPound was the largest gainer of any major currency on the day, as a bullish inflation report propelled it broadly higher. This was especially pronounced against the Swiss Franc, which was among the sharpest decliners on dovish commentary from SNB board member Philipp Hildebrand. These factors combined to push the GBPCHF a full percentage point higher with the highest daily point range since July, 2005.  Pound bulls were given ample reason to bid the currency higher, as the early morning CPI report showed that prices gained 0.4 percent in August, a substantial increase compared to Julys 0.1 percent decline. Such inflation served to vindicate MPC members who voted to increase rates by 25 basis points last month, and improves prospects for a further hike by the end of 2006. In Switzerland, however, the outlook on future rate hikes worsened, as an SNB official said that the domestic economy was likely past its peak growth. Tempered expectations of future rate hikes led the Swissie lower, with the GBPCHF finishing just 50 points shy of 2-year highs. 

GBPJPY

Continued losses in the Japanese Yen led it sharply lower against the Pound, as investors pared bets that weakness in the Asian currency would be an important topic of discussion at the weekends G7 meeting. Traders who initially thought that the leaders of the worlds largest economies would discuss the Yens record-lows against the Euro and declines against other major currencies were disappointed to see the omission of any such concerns in an initial draft of prepared statements. Coupled with continued JPY weakness on lower BoJ interest rate expectations, the Sterling-Yen is now above the psychologically significant 220.00 level. Any further moves will likely depend on the release of the minutes from the most recent Bank of Japan meeting in the overnight session, but many feel that risks on the Yen remain to the upside after such a sharp recent sell-off.

EURGBP

The Pounds assault on majors left the EURGBP at its lowest levels sine Wednesday of last week. Rumors of a large governmental purchase of the EURUSD were not enough to slow declines in the European Pound-Euro cross. This was an especially unique circumstance given that the Euro was able to rally against both the JPY and CHF. Regardless, it seems that expectations of further BoE hikes dominated trading on the day, as there was little market-moving data out of the EMU economies. This is consistent with recent money flows to higher-yielding currencies, with the GBP and USD as the primary beneficiaries. Indeed, such interest-rate sensitive gains against the Euro my in fact continue if the coming EMU inflation data surprises to the downside. Given synthetic forward rates showing expectations of two further rate hikes by year end, risks remain to the downside for the future of ECB monetary policy tightening.