Daily Insight

The dovish sentiment surrounding the Bank of England interest rate decision has driven the Pound to the lowest level on record against the Euro after a host of negative economic reports boost speculation of a rate cut.

The UK currency also plunged to a six week low versus the Dollar amid reports that house prices dropped by the most since 1992 last month as the seizure in credit markets forced lenders to terminate mortgage offers and raise rates.

According to the report from HBOS Plc, the average cost of a home in Britain lost 2.5% in value between February and March and the Pound subsequently plunged against the majors amid speculation that the monetary policy committee will slash interest rates for the third time since December.

The decade long housing boom that has fuelled 62 consecutive quarters of economic growth and helped propel the Labour Party to three election victories appears to be coming to a rapid end.

The sustained drop in house prices coincides with reports that the UK's biggest mortgage lenders are withdrawing offers to new clients as the ongoing credit crunch continues to weigh on confidence.

By the close of trading last night, the Pound had fallen towards 1.2500 against the Euro as the Prime Minister Gordon Brown made some rather contentious comments to the BBC yesterday.

In a brief statement, Brown said that there is room for the Bank of England to cut interest rates because inflation is low despite the fact that consumer prices have remained above the Bank's 2.0% target are forecast to breach the 3.0% barrier this year.

The unrelenting appreciation of the Euro saw the single currency record a fresh record high against the Pound yesterday while remaining virtually unchanged versus the Dollar as we build up to the ECB interest rate announcement on Thursday.

The lack of price action is fitting considering the expectations surrounding the accompanying press conference where the chairman, Jean-Claude Trichet, may finally acknowledge that Europe is suscepitible to a U.S led economic slowdown.

The Euro-zone economy has enjoyed the best period of growth in seven years but has been largely reliant on exports to support the economy and the recent strength of the Euro will obviously hamper demand.

That sentiment was reflected in a report in Germany this morning as exports where unchanged in February as the Euro rose to within a cent of the $1.6000 barrier versus the Dollar, making exports far less competitive.

The Dollar found some support yesterday as the renewed appetite for riskier assets saw the U.S currency close higher against the majors despite speculation that the economy is in the grip of a recession.

That sentiment was reflected in the surprisingly eventful minutes from the last FOMC meeting where policy makers cut interest rates by 75 basis points. Few analysts were expecting any substantial changes from the February report but considering the disappointing tone of recent economic reports, the Fed's outlook for growth has "weakened considerably".

Concerns are growing with the Open Market Committee that the dramatic downturn in economic growth will be "prolonged and severe".

However, the bearish sentiment of the report was limited as the two dissenters in last month's cut voted for a less aggressive move, arguing that the previous 225 basis points of cumulative easing haven't yet fed through to the economy.

Data Released 9th April

U.K 09:30 Industrial Production (February)

- Manufacturing Output

EU 10:00 Final GDP (Q4)

U.S 15:00 Wholesale Inventories (February)

written by Adam Solomon