Daily Insight

The Pound's dramatic and unrelenting decline against the Euro continued yesterday as the UK currency sank to yet another record low, breaching the 1.2400 level for the first time since the Euro's inception in 1999.

A combination of bleak economic reports in the UK and faster inflation in the Euro-zone contributed to the move as UK unemployment fell by less than forecast in March.

Jobless claims benefits declined 1,200 from the previous month, the first increase in 17 months while average hourly earnings increased beyond initial expectations.

Although the somewhat surprising increase in wages suggests that inflation may accelerate over the coming months, the overall tone of the report adds to evidence that the labour market is beginning to soften.

The global credit crunch is weighing heavily on investor and business confidence and has already ended the decade long housing boom with prices falling 2.5% in March.

The unemployment rate is still at the lowest level since June 1975 but Bank of England policy maker, David Blanchflower, who has consistently favoured a more aggressive phase of monetary easing, expects "some weakening" in employment.

The Chancellor Alistair Darling is banking on a strong labour market to support spending and steer the economy away from the first recession since 1991. However, the RICS house price balance showed that sentiment in the property market has fallen to the lowest level since records began in 1978 and slower growth may encourage the BoE to ignore wage inflation and continue cutting rates.

It seems only a matter of time before the Euro breaks the 1.6000 barrier versus the U.S Dollar and the single currency also rose to a fresh record high against the Pound amid reports that European inflation accelerated beyond initial estimates in March.

The harmonised index of consumer prices showed that the inflation rate rose to 3.6% in March and to the highest level in almost 16-years, which reinforces the ECB's staunchly hawkish stance on monetary policy.

Rising food and energy costs are stoking inflation as the price of oil rose to $115 per barrel yesterday while ECB board member, Juergen Stark, said that Euro-zone interest rates may not be high enough to contain inflation.

The report indicates that the Central Bank simply does not have the room to begin cutting rates even as economic growth cools and the Euro subsequently made rose to a record high versus both the Pound and the Dollar.

The Dollar has dropped over 13% in value on a trade-weighted basis in the past year as the Fed aggressively lowered interest rates to shore up economic growth following the fallout from the collapse of the U.S subprime mortgage market.

The U.S currency plunged to a record low versus the Euro yesterday and relinquished much of the previous day's gains against the Pound as further evidence was released to suggest that the U.S housing recession deepened in March.

Housing starts shrank to the fewest number since 1991 while a separate report showed that manufacturing stabilised with production up 0.3% from February. The number of U.S foreclosures has increased dramatically, which is weighing on property values and undermining construction but a weak Dollar is helping exports and boosting output.

Data Released 17th April

EU 09:00 ECB Monthly Bulletin

U.S 13:30 Initial Jobless Claims (w/e 12th April)

U.S 15:00 Leading Indicators (March)

U.S 15:00 Philly Fed Index (April)

written by Adam Solomon