Daily Insight

The Pound has endured a torrid week against the majors, rising towards the $2.00 barrier versus the Dollar on more than one occasion before a barrage of disappointing reports brings the market back towards the support at 1.9750.

The Group of Seven nations has recently declared that Finance Ministers were against volatile fluctuations in the foreign exchange market but the Pound fell against almost of all of the major currencies before the Bank of England released the minutes from the April policy meeting.

The monetary policy committee took the decision to lower interest rates for the third time since December, cutting its main interest rate to 5.0% as the worst housing slump for nearly 20-years threatens to push the economy into a recession.

The voting pattern of the nine strong committee was expected to be unanimous but the report yesterday showed that two members actually elected to hold interest rates while David Blanchflower favoured a greater 50 basis point reduction.

It was the first three-way split in nearly two years as the Central Bank faces a difficult balancing act in the months ahead. Inflationary pressures are expected to exceed 3.0% this year while the current downside risks to growth have arisen following the deterioration in global credit conditions.

The Pound actually made some moderate gains in the aftermath of the report as the minutes signalled that at least eight of the nine policy makers favoured a gradual easing of interest rates.

One of the two members that voted to keep rates unchanged in April, Timothy Beasley, also said this week that the Bank must focus on controlling inflation after commodity prices rose to a record high.

However, the Pound failed to hold on to those gains for a second day in a row after a separate report showed that UK mortgage approvals fell to the lowest level in over ten years in March as the seizure of credit markets prompted lenders to impose tighter lending conditions.

The Euro rallied back towards the $1.6000 barrier against the Dollar yesterday and although we closed well under this level, the diverging interest rate expectations between Europe and the U.S suggest that a further move to the upside will only be a matter of time.

The single currency also remained virtually unchanged against the Pound as growth in European service industries unexpectedly accelerated in April, reinforcing the idea that the Central Bank could actually lift interest rates.

The report also reiterates that Europe's economy remains resilient to the credit crisis even as the U.S and UK teeter on the brink of a recession. A number of ECB officials including Axel Weber and Juregan Stark have suggested that the Central Bank must restrain inflation, which has accelerated to the fastest pace in nearly 16-years.

The focus today will fall on the German Ifo sentiment index and initial forecasts suggests that business confidence will remain roughly unchanged in April with exports forecast to increase 5% this year.

After falling back towards the $1.6000 level versus the Euro in early trade, the Dollar staged a mini rally against the majors amid speculation that we have reached a potential bottom.

Despite the staunchly hawkish stance of ECB officials on monetary policy, the European economic outlook has taken a turn for the worse in recent weeks while rising commodity prices have all but dismissed the prospect of a 50 basis point in U.S interest rates.

In addition, the Dollar has found support from better than expected housing numbers as existing home sales fall less than forecast in March and that will fuel speculation the housing slump is finally showing signs of abating.

The positive momentum surrounding the Dollar may continue today as we build up to the release of a separate report on new home sales for March, although purchases probably dropped a further 1.7% from the previous month.

Data Released 24th April

U.K 09:30 BoE Financial Stability Report

U.K 09:30 Retail Sales (March)

U.K 11:00 CBI Industrial Trends Survey (April)

EU 09:00 Current Account (February)

GER 09:00 Ifo Index (April)

U.S 13:30 Durable Goods Orders

U.S 13:30 Jobless Claims (w/e 25th April)

U.S 15:00 New Home Sales (March)

written by Adam Solomon