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Interest rates forecast to remain unchanged Back  
Each month, the FINANCE Markets Panel, which consists of leading Irish market participants and analysts, provides views on key financial markets, covering currencies, equities and the gilt markets.
This month’s contributors are: James Jordan, technical analyst, Ulster Bank, Niall Dunne, financial markets economist, Ulster Bank, Eugene Kiernan, head of asset allocation, Irish Life, Alan O’Neill, head of corporate treasury, Barclays Bank and Enda Coll, head of institutional treasury, Anglo Irish Bank.

Euro 1 month interbank rate
Coll says that given the current economic uncertainty both in Europe and America, it is highly unlikely the ECB will raise interest rates before Q2 2003. At the moment, he says that the chance of a rate cut outweighs the chance of any hike in rates. Kiernan agrees and says that interest rates don’t seem to be headed anywhere soon. While the economic picture in the Eurozone merits a lower interest rate structure, Kiernan says that Duisenberg remains of the view that current levels are appropriate. If the economy does weaken further, the clamour for cutting rates may overpower the inflation and money supply pillars, which shape ECB policy. He’s leaving his interest rate forecasts unchanged from last month at 3.30 in 3/6 months time, as the market has moved a bit somewhat in his expected direction.

5-year euro swap rate
Given that longer-term euro rates have fallen by almost one percent over the past few months, Coll says that it is likely that the five-year swap rates will consolidate for a period between 4.00% and 4.40%.

O’Neill says that sterling remains one of Barclay’s favoured currencies and says that it is benefiting from strong support. His 6 month forecast for sterling is 0.6. Kiernan says that sterling could weaken a bit, as UK manufacturing would benefit; but he feels that the currency debate has moved further down the political agenda in the UK.

While US economic fundamentals continue to disappoint, (August’s trade deficit reached a new record of 38 billion dollars, consumer confidence has fallen to a 9 year low), Dunne holds with his expectation that the euro will end the year higher. If it were not for the internal disharmony among the EU states (calling the Stability and Growth Pact stupid, for example), the euro would eventually gain on the dollar’s problems. However, thanks to internal wrangling in the Eurozone, any such gains are still some time off. Assuming military action comes back on the agenda, EURUSD could end the year in the high 0.99 range. O’Neill is of the opinion that for the time being at least, the bear case against the currency has receded, and is advising trading the dollar from the long side. His six month forecast is for the dollar to be at .92.

Jordan says that the recovery off the 7197 low has been impressive but that this does not change the longer-term bear view. A short-term further recovery to 8700/9000 is possible he says before topping out and restarting the downtrend. Downside targets further out are 7000/6800. Kiernan also wouldn’t rule out the possibility of a better end to the year and with the current record high levels of volatility, he’s forecasting that the Dow could move to 9000 over the next 3-6 months. He says that the overriding risk remains in the global political sphere.

10-year euro bond yield
Jordan says that the 10-year euro bond yield will rebound from a 4.3750 double bottom, which will set up a stronger bounce for yields. Looking for any sell off to base ahead of 4.57/52 and a new rally to unfold, which can reach 4.88 before topping out.

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