Daily Insight

The Pound fell to a fresh record low against the Euro yesterday and also paired fresh losses versus the majority of the 16 most actively traded currencies following reports that consumer prices rose at a slower pace than forecast in March and the slump in housing deteriorated to the worst level since 1978.

The UK currency plunged through the major support at 1.9650 and to the lowest level in six weeks against the Dollar as news broke that the UK inflation rate remained unchanged at 2.5% last month.

The result matched the previous reading in February but fell short of initial expectations, giving the Bank of England scope to cut interest rates beyond the current 5.00%.

The Pound subsequently declined to a record low against the Euro, breaching the 1.2400 barrier amid speculation that the monetary policy committee will implement a back-to-back rate cut in May.

The annual pace of inflation has exceeded the Bank's 2.0% target for the past six months in a row but consumer price expectations seem to be moderating despite the unexpected increase in UK factory prices over the same period.

Higher food and energy costs prompted the governor of the Bank of England to forecast inflation rising above 3.0% this year but UK employees have struggled to win bigger pay increases and average earnings probably rose at the weakest pace in seven months.

The underlying weakness in Sterling sentiment is likely to dominate the market over the coming weeks as the overwhelming drop in the RICS house price balance provokes speculation that UK interest rates will fall towards 4.00% this year.

The resilience of the European economy has been called into question recently and analysts are becoming increasingly pessimistic on the outlook for growth as the report from the ZEW centre of economic research illustrated.

Investor confidence in Europe's largest economy unexpectedly fell in April amid concerns that faster inflation, a strong Euro and the fallout from the credit crisis weighs on growth.

The ZEW index declined to reading of minus 40.7 from March, which coincides with the mixed tone of economic data in recent weeks as the gauge of analyst expectations approaches the lowest level in 15-years.

Although the Euro increased to a record high against the Pound yesterday, the single currency fell by almost a cent versus the Dollar as the ECB chairman, Jean-Claude Trichet, made a statement in New York, saying that the Central Bank will have less leeway to decide on interest rates.

His comments come in the aftermath of the G-7 summit in Washington at the weekend and reflect the members concerns on the recent instability surrounding the market.

The Dollar staged a modest recovery against the majors yesterday, removing on the heels of stronger economic data as the Empire State manufacturing index unexpectedly surged high in March while foreign purchases of U.S securities increased by more than anticipated in February.

The Dollar has declined a record low against the Euro in recent weeks and the modest rebound in manufacturing suggests that U.S exports are finally becoming more attractive.

Elsewhere, a separate report illustrated the persistent inflationary concerns that may prompt the Federal Reserve to implement a smaller 25 basis point reduction in April.

U.S producer prices increased almost twice as much as initial forecasts in March as higher fuel and food costs threaten to entrench the economy. The 1.1% gain from the previous month coincides with the rising cost of raw materials and the focus today will inevitably fall on the CPI report, which may show that a broader measure of inflation also accelerated in March.

Data Released 16th April

UK 09:30 Claimant Count (March)

- Unemployment Rate

UK 09:30 Average Earnings (February)

EU 10:00 Harmonised Consumer Price Index (March - Final)

U.S 13:30 Housing Permits (March)

U.S 13:30 Consumer Price Index (April)

U.S 14:00 Industrial Production (March)

- Capacity Utilisation

U.S 20:00 Fed's Beige Book (April)

written by Adam Solomon