Daily Insight

Following on from last week, the increased sense of stability that has returned to financial markets has helped Dollar sentiment in recent weeks as traders appetite for risk aversion subsided and U.S stocks rallied.

Nevertheless, a barrage of weak economic data suggests that the U.S economy is in the grip of a recession and the third consecutive monthly drop in U.S jobs only serves to increase speculation of further interest rate cuts to come.

Non-farm payrolls shrank by 80,000, which was significantly more than forecast, while the unemployment rate rose to the highest level since September 2005.

The damaging report from the Labour Department indicates that job losses will shake consumer confidence and contribute to a downturn in spending that threatens to curtail the pace of economic growth.

The report also follows a recent statement from the chairman of the Federal Reserve, Ben Bernanke, who acknowledged that the economy may face a recession and will need to do more, in terms of slashing interest rates, to prevent further deterioration.

Despite the third contraction in job growth in just three months, the Dollar stood relatively firm against the majors, closing well under the $2.00 barrier against the Pound on Friday.

The Dollar's position will surely be tested today as the focus switches to the FOMC minutes of the March meeting where policy makers cut the benchmark lending rate by 75 basis points to 2.25%.

The recent price action surrounding the Euro and the deteriorating outlook for the Euro-zone economy has hampered the single currency over the past week as speculation builds that a U.S led ecomomic slowdown is spreading to Europe.

The Euro has risen to fresh record highs against both the Pound and the Dollar in the last month but a monumental shift in commentary from the ECB President this Thursday would be very bearish for Euro sentiment.

The recent downturn in growth and the mixed tone of economic reports has severly underminded the ECB's staunchly hawkish stance on inflation and provoked some officials to publicly express their concerns over an inpending slowdown in growth.

Therefore, the focus this week will be firmly fixed on the ECB interest rate announcement on Thursday and although the governing council will refrain from cutting rates this month, the market will be looking for a shift in tone in the accompanying statement.

The Pound has struggled to consolidate on the recent gains made against the majors as the maket continues to factor in a 25 basis point cut in UK interest rates this Thursday.

The deteriorating outlook for the UK economy combined with the escalating crisis in credit means that policy makers must intervene and provide some relief to the consumer while bringing some stability back to the market.

Two members out of the nine strong committee actually voted for a cut in March and the minutes from the MPC meeting showed that the Bank was very concerned with the perception of a back-to-back rate cut.

Therefore, a quarter of a percentage point cut is a close call but the most likely outcome of the two day meeting as the growing reluctance of mortgage lenders to extend new loans may force the BoE into taking further action.

Data Released 7th April

GER 11:00 Industrial Production (February)

U.S 20:00 Consumer Credit (February)

written by Adam Solomon