Daily Insight

Following on from last week, the Pound recorded another weekly loss against both the Euro and the Dollar amid speculation that the Bank of England will continue cutting interest rates as economic growth stalls.

The UK currency plummeted to fresh record lows for three consecutive days against the Euro as reports showed a 2.5% drop in house prices while consumer confidence slipped to the lowest level in nearly four years.

The Bank of England's monetary policy committee elected to lower interest rates for the third time since December. The tone of the accompanying statement suggests that policy makers may be forced to lower rates consecutively in May, eroding the allure of Sterling denominated assets.

The Bank also highlighted that credit conditions are tightening and further monetary easing may be necessary in order to provide some relief to the financial sector and force lenders to lower rates.

The governor of the Bank of England, who also mentioned the persistent inflationary concerns that threaten the pace of growth, has faced a barrage of criticism over his handling of the credit crisis.

According to the head of the Council of Mortgage Lenders, the BoE should be prepared to be more flexible in their handling of the credit crisis and urged Mervyn King to keep his word and show leadership in times of turmoil.

The positive sentiment surrounding the Euro continued last week as the single currency rose to within a cent of a fresh record high versus the Dollar following the ECB's decision to keep interest rates unchanged while other Central Banks begin a period of easing.

In addition, the tone and language used in the accompanying press conference suggests that policy makers are still more concerned with the threat of inflation despite a host of reports that indicate an impending slowdown in growth.

That sentiment was reflected in a statement on Friday from ECB governing council member Axel Weber who said that the Bank doesn't have the scope to cut interest rates with inflation running at the fastest pace in nearly 16-years.

Consumer prices have remained above 3.0% this year but the International Monetary Fund said last week that inflation in the Euro-zone will slow to 1.9% in 2009 and therefore the Central Bank will resist calls for a rate cut until at least the third quarter.

Due to a distinct lack of economic data, the Dollar was largely susceptible to news in Europe and the UK as the Bank of England elected to lower interest rates and the Group of Seven nation met in Washington.

The Dollar rose to a one week high against the Euro and also made further gains against the Pound after the G-7 changed its statement on currencies for the first time in four years and said that sharp fluctuations in the market may hurt the global economy.

The shift in the tone of the statement suggests the G-7 are prepared to intervene accordingly and prevent sharp volatility in the foreign exchange market after the Dollar dropped 12% in value over the past year alone.

The Dollar rallied in the aftermath of the statement but the dwindling sentiment surrounding the U.S economy was emphasised in a regional survey on consumer confidence.

The preliminary index of the Michigan sentiment showed that confidence sank to the lowest level in 26-years this month as fuel prices continue to rise and the labour market deteriorates.

Data Released 14th April

U.S 09:30 Producer Price Index (March)

- Output

EU 10:00 Industrial Production (February)

U.S 13:30 Retail Slaes (March)

U.S 15:00 Business Inventories (February)

written by Adam Solomon