Daily Insight

The Pound struggled against the majors for a second day in a row yesterday as a barrage of mixed economic data renewed concerns that the UK economy is slowing as the RICS house price balance came in much lower than expected.

According to a report from the Royal Institution of Chartered Surveyors, the number of residential property agents reporting falling prices exceeded initial forecasts and declined by the most since June 1990 while the balance of the report was the worst since May 2003.

The recent turbulence surrounding financial markets and the impact from the U.S subprime mortgage crisis has led to tighter lending conditions and that threatens to curtail the decade long housing boom and contribute to a sharp downturn in growth.

Just last month the U.K's most profitable homebuilder, Bovis Homes Group plc, publicly urged the Bank of England to take "decisive action" and lower interest rates from the current 5.25%.

However, the recent pickup in the BRC sales monitor continued in February while a separate report on house prices showed a rebound in certain areas of the country.

The Pound may receive some support this morning following the release of the UK trade balance where the deficit between goods and services is expected to narrow in January.

Despite the surprisingly dovish rhetoric from the ECB President, Jean-Claude Trichet, the Euro hit back yesterday and soared to a fresh record high against the Dollar following reports of a sharp improvement in German investor confidence.

The ZEW Centre for European Economic Research reported that its index of investor and analyst expectations unexpectedly rose for a second consecutive month in March. The Euro peaked at 1.5496 against the ailing U.S Dollar and also made further gains versus the Pound as the report only added to recent evidence that Europe's largest economy is coping with the Euro's appreciation and a U.S economic slowdown.

The positive momentum surrounding the Euro continued as ECB governing council member Axel Weber said that there is no room for the Central Bank to lower interest rates.

Nevertheless, the ECB has expressed concerns over a strong Euro and the impact on the economy and yesterday the Central Bank intervened by letting the Federal Reserve provide as much as $200 billion of liquidity into the financial system and agreed to lend up to $15 billion in joint action with the Fed.

By the close of trading last night, the Dollar clawed back some gains against the Euro and also rebounded versus most of the major currencies amid reports that the Federal Reserve will extend $200 billion of credit to financial institutions in order to boost lending and steer the economy away from a recession.

The market took the news very positively and the U.S Dollar subsequently rallied as speculation intensified that the Fed won't slash interest rates by a further 75 basis points this month.

The news that the Fed will provide limitless funds of Treasuries in exchange for debt including slumping mortgage-backed securities is an indication that the Reserve Bank is fiercely dedicated to preventing a recession and an injection of liquidity combined with falling interest rates may encourage lending.

In terms of economic data, the Dollar also received support as news broke that the U.S trade deficit was smaller than forecast in January as a weaker dollar increased demand for U.S made goods.

Data Released 12th March

UK 12:30 Budget Speech

UK 09:30 Trade Balance (January)

EU 10:00 Industrial Production (January)

U.S 18:00 Federal Budget (February)

written by Adam Solomon