Daily Insight

The recent revival in Sterling sentiment was severely tested yesterday as the UK currency was once again susceptible to weak economic data as UK house prices fell by the most in three years this month.

The average cost of a home in Britain decreased 0.6% from March, the most since December 2004, to £173,100 as tightening credit conditions and concerns that the property slump is worsening deterred homebuyers.

Compared to this stage in 2007, house prices have declined 0.9% as a surge in borrowing costs prompted banks and lenders to withdraw their best mortgage offers.

Falling home values is weighing heavily on confidence while a downturn in spending has seen the economy grow at the slowest pace since the first quarter of 2005.

According to a statement from Hometrack Ltd, "weak confidence is effectively resulting in a buyers strike" while the current downward trend on prices will only begin to subside once stability returns to financial markets and the economic outlook improves.

In the aftermath of the report, the Pound declined against most of the 16 most actively traded currencies and UK government bonds rose as speculation increased that the Bank of England will continue cutting interest rates.

Nevertheless, the Pound actually paired gains against both the Pound and the Euro by the close of trading last night but the UK currency may struggle to hang on to those gains amid the release of a report on Mortgage approvals this morning.

The Euro has fallen to a three week low against the Dollar and has posted heavy losses versus the Pound in recent trading sessions as a strong currency hurts exports and threatens the future outlook of the European economy.

The single currency has risen almost 10% in value against the Pound this year but there are some signs that we have reached the bottom of this move after a fairly robust rally over the past week.

Euro sentiment was further hampered yesterday as inflation in Europe's largest economy actually slowed by more than initial forecasts in April. The annual pace of inflation in Germany fell to an astonishing 2.6% this month from 3.3% in March.

Although the figure won't suddenly alleviate the ECB's concerns on inflation, the report may have a bearing on future policy and force the Central Bank to acknowledge the downside risks to economic growth by joining the BoE and the Federal Reserve in cutting interest rates.

The recent price action surrounding the Dollar suggests that the U.S currency may extend its recent upside move against the Euro as the focus switches to the FOMC rate decision tomorrow evening.

The market has been growing increasingly confident that the Federal Reserve will only implement a 25 basis point reduction but a recent upturn in economic data has provoked speculation that the Open Market Committee will remain on hold this month.

Although there has been no official comments from Fed officials, the continual and aggressive rise in oil and commodity prices will be stoking inflation and may convince the Fed chairman, Ben Bernanke, to put the brakes on any further monetary easing.

However, a sharp rise in the price of oil will see fuel prices increase while falling home values are weighing heavily on consumer confidence. The Dollar may struggle against the Pound this afternoon as the Conference Board's index of confidence probably fell to the lowest level since October 1993.

Data Released 29th April

UK 09:30 BoE Mortgage Approvals (March)

UK 09:30 Consumer Credit (March)

UK 11:00 CBI Distributive Trades Balance (April)

U.S 14:00 Case / Shiller House Prices (February)

U.S 15:00 Consumer Confidence (April)

written by Adam Solomon