Daily Insight

Following on from last week, the Pound succumbed to speculation that the Bank of England will reduce interest rates by a further 25 basis points in May following a 2.5% drop in house prices and news that retail sales had contracted for the first time in three years.

Nevertheless, a surprisingly positive report from the Bank of England catapulted the Pound towards the $2.00 level on Friday and further gains were anticipated amid speculation that the BoE and the Treasury will announce new asset swap proposals this week.

The initiative is designed to provide some relief to financial institutions and encourage lenders to reduce mortgage rates while preventing the housing market from curtailing the pace of economic growth.

However, the Pound has relinquished almost all of the gains against the Dollar this morning following the Bank of England's announcement that it will swap £50 billion of government bonds in favour of mortgage backed securities.

The market's unexpected interpretation of the initiative suggests that the extent of the credit crisis is yet to be realised as the Bank of England attempt to a spark a revival in lending.

The Pound has fallen back towards the support at 1.9896 against the Dollar after breaching the $2.00 barrier for the first time in two weeks and the UK currency may struggle to recapture those gains this morning as UK house price fell a further 0.1% in March.

The Euro has consistently made gains this year as a combination of strong economic growth and tighter monetary policy propelled the single currency to post record highs against both the Pound and the Dollar but there are some signs that the economy is no longer immune to the credit squeeze.

The Euro fell by the most in three weeks versus the Pound and also retreated from the 1.6000 level versus the Dollar as ECB governing council member, Jean-Claude Juncker, described the Euro's meteoric rise as "undesirable".

However, the contrasting comments from Bundesbank Bank president Axel Weber seems to suggest that there a division brewing within the ECB as he reminded the market that the ever present inflation concerns make it impossible for the Central Bank to cut interest rates.

Data Released 21st April

UK 00:01 Rightmove House Prices

written by Adam Solomon