Daily Insight

The speculation surrounding an April interest rate cut has hampered Sterling sentiment this week and the UK currency may struggle to make gains in the build up to the April 10th meeting as the ongoing credit crisis threatens to send the economy into recession.

The Bank of England have lowered interest rates on two occasions since August but tightening credit conditions means that lenders are reluctant to lower mortgage rates while a number of major financial institutions may follow the path of the troubled lender Northern Rock plc.

The Bank of England have released $10 billion at any one time in emergency funding but the divisions in lending are expected to escalate. First Direct, which is a branch of HSBC, announced yesterday that they would be withdrawing all of their mortgages to homeowners who were not existing customers and Halifax, the UK's biggest lender, is rumored to be following suit within the next week.

This initiative has the potential to curtail growth in the UK housing market as lenders hike interest rates on loans and remove their mortgage lending products completely.

That sentiment was reflected in a report from the Bank of England yesterday where UK mortgage approvals slumped towards the lowest level in nine years in February as banks freeze applications and curb lending.

The Pound struggled to recover any of the losses versus the Dollar but remained virtually unchanged against the Euro amid a mixed bag of UK economic reports.

The Purchasing Managers' index for construction contracted for the first time in six years while consumer credit advanced to the highest level in five years.

The heightened sense of volatility surrounding the market seemed to gather momentum yesterday as the Euro declined against the Dollar in early trade following speculation that the U.S led recession will spread to Europe and lead to a reduction in European interest rates.

The ECB have been almost obsessed with containing inflation as the annual pace of consumer prices remains above the 3.0% barrier but there are signs that the economy is feeling the pressure from the credit crunch and a strong currency.

An EU report this morning may show that Euro-zone retail sales grew at half the previous month's pace in February while the focus will surely fix on Jean-Claude Trichet's speech in Berlin.

The chairman of the European Central Bank may recognize the downside risks to economic growth as a number of governing council members indicate that inflation will slow by the end of the year.

By the close of trading last night, the Dollar had resumed its downward momentum against the Euro and also recorded modest losses versus the Pound after the Fed chairman, Ben Bernanke, acknowledged for the first time that the U.S economy is headed towards a recession.

In a testimony to the Congress's Joint Economic Committee, Bernanke said that U.S gross domestic product will not advance too much, if at all, this year and may even contract.

Bernanke's first public comments since the Fed lowered interest rates by 75 basis points in March also focused on the Bank's emergency loan to Bear Stearns Cos after the troubled firm warned that it would have to file for bankruptcy the following day.

Although the Fed have implemented a number of rate cuts in order to provide some relief to the market, the tone and language used in Bernanke's statement yesterday suggests there could be more to come with the Fed Fund Futures market already pricing in a 90% chance of a 25 basis point reduction this month.

In terms of economic data, the Dollar found little support as the strong rebound in the ADP employment index provides some indication that non-farm payrolls with exceed expectations on Friday.

Data Released 3rd April

UK 09:30 CIPS Services PMI (March)

UK 09:30 BoE Credit Conditions Survey

EU 09:00 RBS Services PMI (March - Final)

EU 09:00 Retail Sales (February)

U.S 13:30 Weekly Jobless Claims (w/e 29th March)

U.S 15:00 ISM Services (March)

written by Adam Solomon