Daily Insight

The Pound declined against all but one of the 16 most actively traded currencies yesterday as the market reacted to news that the UK government plans to nationalise Northern Rock Plc and take control of the struggling lender amid the continued instability in the UK financial sector.

Gordon Brown's decision received widespread criticism yesterday and the Pound came under intense scrutiny as news followed that the government rejected two private sector bids to save the troubled lender.

The Bank of England was forced to provide emergency funding to Northern Rock plc in September as a sudden surge in credit costs led to the first run on a British Bank in over a century.

Tighter lending conditions after the collapse of the U.S subprime mortgage market has restrained consumer spending and led to an economic slowdown with the MPC lowering interest rates twice in just three months.

The Pound declined heavily against the Dollar and failed to find any support as a report from Rightmove plc showed that UK house prices rose for the first time in three months in February.

The price of a home in Britain climbed 3.2% following a 0.8% contraction the previous month and the report provides some optimism that the decade long housing boom has yet to end while further monetary easing may boost consumer sentiment.

Following a fundamental lack of Euro-zone economic data, the Euro fell marginally against the Dollar yesterday as ECB governing council member Liikanen said that growth in the region will fall below 2% this year due to weakening business and consumer sentiment.

The mixed messages coming out of the Central Bank confirms the market's belief that policy makers are beginning to focus on slowing economic growth rather than the upside risks to price stability.

A number of ECB officials have publicly expressed their concerns over the impact of the U.S subprime mortgage crisis while the ongoing turmoil in financial markets may convince policy makers to begin lowering Euro-zone interest rates.

The Euro has recorded it biggest weekly decline this year over the past week and that trend may continue today as ECB member Christian Noyer joined the chorus of voices focusing on weaker economic growth.

The recent price action surrounding the Dollar suggests that the U.S currency is not only susceptible to interest rate speculation with Fed Fund futures currently pricing in a 75% chance of a 50 basis point cut in March.

Nevertheless, the Dollar has made significant gains against both the Pound and the Euro and that trend may continue this week as food and energy costs are forecast to increase in January and drive the price of consumer goods higher.

The Federal Reserve have lowered U.S borrowing costs by 125 basis points over the past month but it seems that the resurgence in Dollar sentiment can be attributed to the market's belief that extensive monetary easing will eventually lead to the recovery in the economy.

Data Released 19th February

U.S 18:00 NAHB Housing Index (January)

written by Adam Solomon