Daily Insight

The recent negative sentiment surrounding the Pound gathered momentum last night as the UK currency fell to the lowest level in 14-months versus the Euro amid reports that UK lender Northern Rock plc sought emergency funding from the Bank of England.

Britain's fifth largest mortgage lender requested a short-term credit line with the loan to be made at a "punitive" rate of interest in order to avert a credit crisis as the impact from the U.S subprime mortgage fiasco threatens more and more entities worldwide.

The Bank of England unexpectedly relaxed restrictions on financial institutions and encouraged them to lend each other more in an attempt to reduce the overnight lending rate that is threatening to curb the pace of economic growth. The move comes only 24hrs after the governor of the Bank of England, Mervyn King, refused to relax the tough policy of loaning funds below the base rate because policy makers can't afford to "encourage excessive risk taking."

In the aftermath of the report, the Pound declined for a sixth straight day against the Euro and also headed for a weekly loss against 15 out of the 16 most active currencies on speculation that the Central Bank will delay a further rate increase. Sellers of Sterling may will be well placed to take advantage of the current rate of exchange before further downside moves are likely over the coming week.

The Euro smashed through the support level at 1.4555 against the Pound and also rose to a fresh record high versus the Dollar yesterday as the single currency prevailed amid increased speculation that the ECB would continue to tighten interest rates.

The Central Bank elected to hold rates steady this month and altered the tone and language in the accompanying statement to suggest that rates may remain on hold amid the increased turmoil in global financial markets.

However, recent commentary from ECB governing council member, Yves Mersch, helped propel the Euro higher yesterday as he stated that the Central Bank "may resume tightening" depending on the analysis of new economic data.

The hawkish bias is particularly pertinent amid reports that the Federal Reserve are likely to cut interest rates this month while the President, Jean-Claude Trichet, continues to call monetary policy "accommodative."

The Dollar established a fresh record low against the Euro for the second day in succession as we tentatively approach the 1.4000 level amid reports that the U.S Federal Reserve will have little option but to lower borrowing costs next week.

However, the Dollar has found some support this morning and is currently holding under 1.3900 ahead of U.S data released today that will surely have a bearing on the decision next Tuesday.

Retail sales growth in August is expected to show that spending accelerated last month while consumer confidence was near the lowest level since August 2006 as investors decrease bets that the Fed will lower rates by 50 bias points to 4.75% and cut the U.S yield advantage over Europe.

The Dollar has also made significant gains against the Pound with a host of U.S economic data due for release this afternoon with the U.S current account deficit expected to narrow in the second quarter while industrial production probably increased 0.3% last month.

Data Released 14th September

EU 10:00 HICP (August Final)

U.S 13:30 Export & Import Prices (August)

U.S 13:30 Current Account (Q2)

U.S 14:15 Industrial Production (August)

U.S 15:00 Business Inventories (July)

U.S 15:00 Michigan Sentiment (September Prelim)

written by Adam Solomon