Daily Insight

Following on from last week, the Pound slumped to a fresh record low against the Euro and also registered sharp losses versus the U.S Dollar, plummeting through the $2.00 barrier amid an increased level of market volatility.

Growing concerns over the economy and dwindling consumer confidence led to speculation that a number of financial institutions, including HBOS plc, will need to seek emergency funding from the Bank of England in order to avert a liquidity crisis.

Sterling sentiment was further hampered as the minutes from the Bank of England's last policy meeting showed that two members of the monetary policy committee actually voted for a cut in UK interest rates this month.

Nevertheless, the Pound recovered some gains against almost all of the 16 most actively traded currencies yesterday following reports that UK retail sales unexpectedly accelerated in February.

According to the report from the Office of National Statistics, sales climbed a whole 1% from the previous month despite forecasts of a 0.2% drop. The surprising rebound in consumer spending will spur economic growth and dispel concerns over a second credit crisis and a declining housing market.

The Bank of England must balance the risks of an economic slowdown against rising inflationary pressures with consumer prices likely to breach 3.0% later this year following the sustained increased in food and energy costs.

The tentative price action surrounding the Euro continued last week as a distinct lack of European economic data saw the market consolidate back towards 1.5500 against the Dollar and alleviate the pressure on the ECB to intervene.

The overwhelming appreciation of the Euro has become a major concern to the ECB's governing council as the single currency rallied to record highs against both the Pound and the Dollar.

In terms of economic data, the Euro failed to find much support on Thursday as growth in Europe's manufacturing and service industries slowed by more than initial forecasts.
A preliminary estimate of the EC index showed that economists growth expectations have been lowered for 2008 and the report provides an indication that the Euro's dramatic increase and record high oil prices will continue to erode growth in the months ahead.

The Dollar has fallen by the most in two weeks against the Euro while the U.S currency relinquished some of the earlier gains versus the Pound despite European money markets being closed for the Easter holiday and an unexpected rebound in existing home sales.

Sales of previously owned homes unexpectedly rose 2.9% in February after six consecutive months of negative home sales and the report will provide some optimism that the Fed's aggressive easing of interest rates will spur a rebound in housing.

Nevertheless, the Dollar has fallen significantly against the Euro this morning and further downside movement is likely as the market anticipates a drop in U.S consumer confidence.

The heightened speculation surrounding the Federal Reserve's next move on interest rates is likely to hamper dollar sentiment while the report this afternoon may show that the decline in confidence exceeded initial forecasts and plunged to lowest level in five years.

Data Released 25th March

U.S 13:00 Case Shiller House Prices (January)

U.S 14:00 Consumer Confidence (March)

written by Adam Solomon