Daily Insight

The increased level of volatility surrounding the Pound continued yesterday as the UK currency staged a strong intraday reversal against the Dollar and remained almost unchanged versus the Euro despite the distinct lack of UK economic reports.

The heightened inflationary concerns have all but diminished the prospect of an aggressive easing of interest rates and that has helped Sterling rally to highest level in 3 months versus the Dollar.

That sentiment was echoed in a survey by the Bank of England yesterday where Briton's inflation expectations rose to the highest level in at least eight years and added to the case for pause in monetary easing.

Consumer prices are forecast to increase at an annual pace of 3.3% in the next year, up from 3% in the last quarter and the highest result since 1999. Soaring food and energy costs have pushed up prices while the current level of inflation has exceeded the BoE's target for the past four months.

Oil prices have increased to a record level this week, touching a high above $109 per barrel and pushing higher costs on to the consumer. A number of Bank of England officials have echoed these concerns on inflation, which is in stark contrast to the tone of the Chancellor's first budget speech on Wednesday.

Alistair Darling stated that the UK economy is "resilient" and inflation rates remain "low" but in a consumer survey just 30% of respondents were satisfied with the way the Bank of England is setting interest rates and controlling inflation.

The overwhelming strength in the Euro combined with broad Dollar weakness saw the single currency rally to a fresh record high yesterday and further gains are likely this morning amid the release of the harmonised index of European consumer prices.

The chairman of the ECB Jean-Claude Trichet has reiterated his concerns over excessive exchange rate movements but despite the undeniable impact on Euro-zone export growth, the governing council are still more concerned with the threat of inflation.

In an interview yesterday, Trichet said that if the ECB failed to ensure price stability, it would cause further market turmoil and a crisis in consumer confidence.

In other words, the ECB's governing council is unlikely to intervene in the near-to-medium term but should the Euro breach the 1.6000 barrier versus the Dollar, the subsequent impact on export growth would risk an economic slowdown.

The Dollar came under further pressure yesterday, dropping to a decade low versus the Yen and falling to the lowest level on record against the Euro amid reports that the hedge fund struggled to meet its margin calls last week and now faces outright liquidation.

The news triggered a sharp drop in U.S stocks and despite the Fed's efforts to bring stability to the market by injecting $200,000 in liquidity, a further 75 basis point cut seems inevitable next week.

The Federal Reserve have lowered interest rates to 3.0% over the past six months and even with consumer prices expected to increase in the report this afternoon, Fed Fund futures are currently pricing in a 94% probability of 75 basis point reduction on the 18th March.

Data Released 14th March

EU 10:00 Final HICP (February)

U.S 12:30 Consumer Price Index (February)

- Ex Food & Energy

U.S 12:30 Real Earnings (February)

U.S 13:55 Michigan Sentiment (March Prelim)

written by Adam Solomon