Daily Insight

The overwhelming decline in Sterling sentiment saw the Pound crash to fresh record low against the Euro yesterday as UK stocks tumbled by the most in two years following reports that the fifth largest U.S securities firm fell into liquidation.

The level of volatility surrounding financial markets at present has prompted investors to seek lower yielding currencies amid an increased appetite for risk aversion. The Pound also slumped against the Dollar as the Fed's decision to lower the discount lending rate in an emergency meeting over the weekend showed that the ongoing financial crisis is worsening.

The negative sentiment surrounding the Pound is likely to continue today as the impact of the U.S led credit crunch dampens confidence and threatens to curtail the pace of UK economic growth.

In terms of economic data, the focus this morning will fall on the latest round of inflationary data as consumer prices are forecast to be strong given the rise in BRC shop and producer prices.

Despite the ongoing financial crisis and the possible implications on the Euro-zone economy, the Euro rose to within just a point of the 1.6000 level versus the Dollar while also pairing record gains against the Pound as the ECB remain seemingly undeterred with the rising value of the single currency.

Nevertheless, in a recent interview the President of the Central Bank, Jean-Claude Trichet, expressed concerns over sharp and excessive moves in the currency market and it will be interesting to gauge the Central Bank's response should the Euro break the 1.60000 barrier versus the Dollar.

The European Central Bank's top priority is inflation and managing the potential risks to price stability because the Euro has only appreciated 10% against the Dollar over the past two months and a strong currency is cushioning the effects of high commodity prices.

The Dollar fell for a fifth straight day against the Euro and failed to breach the $2.0000 barrier versus the Pound as speculation intensifies that the Federal Reserve will reduce interest rates by a full percentage point this evening in the latest attempt to restore confidence to the market.

The demise of Bear Stearns sent shockwaves through the market yesterday and that could prompt the Fed to implement the biggest interest rate cut for over 23 years, reflecting the severity of the U.S economic slowdown.

The focus this evening will surely switch to the FOMC rate decision but in terms of economic data, the Dollar may struggle to find any support as a government report is expected to show that U.S housing starts fell to the lowest level in 17-years last month.

The worst housing slump for nearly twenty years is showing no signs of recovering and despite interest rates falling to 3.0%, falling property values and tighter lending conditions will do little to boost confidence.

Data Released 18th March

UK 09:30 Consumer Price Index (February)

- RPI

U.S 12:30 Housing Starts (February)

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

- Ex Food & Energy

U.S 18:15 FOMC Rtae Decision

written by Adam Solomon