Daily Insight

The unrelenting decline in Sterling sentiment saw the UK currency plunge to a fresh record low against the Euro yesterday and breach the 1.2500 barrier for the first time as the market anticipates a quarter-point cut in UK interest rates.

The Pound has struggled to make gains against most of the 16 most actively traded currencies this week as a host of negative economic reports suggests that the economy is headed precariously for a recession.

According to a report from the Nationwide Building Society, UK consumer confidence fell to the lowest level in nearly four years last month amid falling home values and rising mortgage rates.

House prices fell 2.5% last month, the most since 1992, as the seizure in credit markets prompted some lenders to withdraw mortgage offers to new customers.

Nevertheless, the UK economy is showing some signs of resilience as a separate report from the Confederation of British Industry showed that manufacturing had unexpectedly increased for a second consecutive month in February.

The Pound's weakness against the Euro is seemingly helping raise demand for UK exports and that sentiment may be reflected in the trade balance data this morning where the deficit in goods and services expected to narrow in February.

The focus today will inevitably fall on the Bank of England interest rate decision this lunchtime where Euro and Dollar buyers may want to think about placing a stop order in the market to protect against any further Sterling losses.

The monetary policy committee will probably cut the benchmark interest rates by a quarter point to 5.00% as the worst housing slump since 1992 causes concerns that the economy is slipping towards a recession.

The resilience of the European economy combined with the ECB's staunchly hawkish stance on inflation has taken the Euro to within half a cent of its all time record high against the Dollar while also breaking the 1.2500 barrier versus the Pound.

The latest price action surrounding the Euro suggests that the market expects the Central Bank to hold interest rates steady today while the focus will switch to the tone and language used in the accompanying press conference.

The Central Bank President, Jean-Claude Trichet, is also expected to remain hawkish on protecting the economy from rising inflationary pressures while expressing no concern about the current level of the Euro and the subsequent impact on the economy.

Despite the obvious dip in retail sales, the improvement in the recent trade data is particularly encouraging to policy makers because it confirms that the strength of the Euro is only having a limited impact on exports.

The ECB have been focusing on the threat of inflation rather than the inevitable slowdown in growth and in the last monetary policy meeting, Trichet emphasised the risks to price stability no fewer than eight times.

The governing council have struggled to anchor inflation this year with consumer prices remaining above 3.0% for the past three months and the Euro may continue to gain momentum amid speculation that rate will remain unchanged until September.

The Dollar plummeted to within 50 pips of its record low versus the Euro while the U.S currency also struggled to make gains against the Pound amid a fundamental lack of economic data.

The tentative price action surrounding the Dollar in recent days indicates that the move yesterday represents the dovish sentiment of the Federal Reserve who are expected to lower interest rates again this month.

The Dollar has been largely susceptible to news from overseas as the focus this week falls on the ECB and BoE rate announcements this lunchtime. The minutes from the last FOMC rate decision indicates that the Fed are divided while policy makers are equally concerned with the threats to economic growth and inflation.

In terms of economic data, the Dollar may find some support this afternoon as the U.S trade balance is expected to show that the deficit in goods and services probably narrowed in February as a weak Dollar helped propel exports.

Data Released 10th April

U.K 09:30 Global Trade Balance (February)

- Ex EU Trade

U.K 12:00 Bank of England Rate Announcement

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Trade Balance (February)

U.S 13:30 Initial Jobless Claims (w/e 5th April)

U.S 19:00 Federal Treasury Budget (March)

U.S 15:00 Wholesale Inventories (February)

written by Adam Solomon