Daily Insight

The Pound made some unlikely gains against the Euro yesterday, rebounding from a record low versus the single currency after the Bank of England warned that inflation will rise further this year, as the MPC cut interest rates by a quarter of a percentage point.

The Pound rose for the first time in a week against the Euro and also climbed from a six week low versus the Dollar despite the futures market pricing in further monetary easing to come as the BoE attempt to balance a slowing economy against rising inflationary pressures.

The Pound briefly broke back above the 1.2500 level versus the Euro yesterday before resuming the downward momentum this morning and further losses are likely in the near-to-medium term amid speculation of a back-to-back rate cut in May.

In the accompanying statement, the Bank's monetary policy committee highlighted that downturn in housing threatens curtail the pace of UK economic growth.

However, policy makers also acknowledged that inflation will continue to accelerate this year in accordance with the rapid rise in food and energy costs.

The Pound has fallen 9% in value against the Euro this year alone amid the diverging interest expectations between Europe and the UK with the ECB expected to keep rates unchanged until the third quarter.

The recent price action surrounding the Euro suggests that the market was anticipating a hawkish rhetoric from the ECB yesterday after the Central Bank elected to leave interest rates unchanged at 4.00% despite the apparent threats to economic growth.

The Euro has risen to a record high for three consecutive days versus the Pound while recent economic reports suggests that the Europe is no longer immune to a U.S led economic slowdown.

Nevertheless, the tone of the accompanying press conference reflected the ECB's staunchly hawkish stance on inflation as the chairman, Jean-Claude Trichet, mentioned 'price stability' no fewer than seven times.

Trichet did mention his concerns over the current level of the Euro but with inflation stuck above the 3.0% barrier, the chances of an interest rate cut before September seems increasingly unlikely.

Due to the fundamental lack of U.S economic data released this week, the Dollar has been largely susceptible to news from overseas but the U.S currency may come under some pressure in the build up to G7 meeting.

The Group of Seven nations are unlikely to agree on a plan to support the Dollar while an industry report may show that U.S consumer confidence fell to the lowest level in 16-years.

The Dollar has weakened to within a cent of the all time record low versus the Euro and further losses are likely over the coming weekend as speculation builds that the U.S economy is in the midst of a recession.

However, a weaker Dollar has made U.S exports far more competitive in global markets and the Fed hope that trade can support growth this year in the wake of the worst slump for over twenty years.

Data Released 11th April

U.S 13:30 Import prices

- Export Prices

U.S 14:55 Michigan Sentiment (April Prelim)

written by Adam Solomon