Daily Insight

The Pound continued the upward momentum against the Dollar yesterday, rising to the highest level in three months at 2.0353 while the UK currency also snapped a two-day losing streak versus the Euro after the UK trade deficit narrowed by more than expected.

The overall weakness in Sterling pushed up exports to the highest level in 18-months while the gap in trade shrank for the second month in a row and the report indicates that net trade may support economic expansion this year.

The ongoing crisis in credit threatens to weigh on consumer spending and the Bank of England is relying on a weaker Pound to encourage exports and offset a decline in retail sales.

Sterling has dropped almost 8% in value over the past six months as the collapse of the U.S subprime mortgage market prompted bank losses and write-downs totalling $190 billion to date.
The subsequent impact on consumer and business sentiment is expected to slow the UK economy to an annual pace of 1.6% in the fourth quarter of 2008, matching the weakest rate since 1993.

The Chancellor of the Exchequer Alistair Darling delivered his maiden budget yesterday and the tone of his statement seemed to indicate that the economy would benefit from further monetary easing.

Nevertheless, the Pound stood firm and finished the day virtually unchanged against the Euro despite renewed speculation of an April rate cut.

The overwhelming strength of the Euro continued yesterday as the single currency rose to a fresh record high against the Dollar, closing above the psychologically important 1.5500 level amid hawkish commentary from a number of ECB officials.

The continual rise in oil prices combined with a drop in U.S credit spending have contributed to the Dollar's decline while the ECB President, Jean-Claude Trichet, gave a speech with the Gulf Cooperation council.

In his statement, Trichet repeated his distaste for excessive moves in the currency market but warned that it is very important for the Central Bank to anchor inflation expectations.

Despite the strength of the Euro and the possible implications to the economy, the ECB are still more concerned about inflation and determined to act to ensure that risks to price stability do not materialise.

As a result, the positive momentum surrounding the Euro is likely to continue over the coming weeks as a barrage of positive economic reports provide some optimism that the Euro-zone economy will withstand a U.S led economic slowdown.

The ailing U.S Dollar fell to a record low against the Euro yesterday and stood just a few pips above an 8-year low versus the Japanese Yen as the latest downside move in the currency and bond markets suggests that traders are suspicious of the Fed's actions on Tuesday.

Initially, the market reacted positively to news that the Fed, in conjunction with other Central Banks, will inject $200 billion in liquidity into the banking system to provide some relief to financial institutions.

Fed Fund Futures indicated that that the FOMC will resist another substantial interest rate cut this month but yesterday traders were pricing in a 74% probability of a 75 basis point reduction on the 18th March.

As a result, the Dollar has fallen heavily against the majors and that trend looks set to continue today as U.S retail sales probably declined in February following a significant increase in food and energy costs.

Data Released 13th March

EU 08:00 ECB Monthly Bulletin Published

U.S 12:30 Import Prices / Export Prices (February)

U.S 12:30 Initial Jobless Claims (w/e 7th March)

U.S 12:30 Retail Sales (February)

U.S 14:00 Business Inventories (January)

written by Adam Solomon