Daily Insight

The Pound has plunged to a record low against the Euro on three separate occasions this week while also recording significant losses versus the Dollar amid speculation of a back-to-back interest rate cut in May as economic growth stalls and the credit crisis deepens.

Nevertheless, the UK currency bounced back above the 1.2400 level yesterday and also recorded gains against most of the 16 most actively traded currencies despite news that the gap between the BoE's benchmark rate and the cost of borrowing rose to the highest level since December.

The Bank of England offered £13.7 billion in liquidity in the monthly auction yesterday while tighter credit conditions means that the shortage in funds is forcing the Prime Minister, Gordon Brown, to find new ways of preventing a recession.

Brown said yesterday that the government was looking for new initiatives to inject liquidity into the mortgage market and is studying measures already taken in the U.S.

In the aftermath of the report, the Pound rallied from a two week low versus the Dollar as speculation builds that the BoE will announce a plan to help financial institutions as the credit crisis plunges the economy towards recession.

The price action surrounding Cable yesterday seems to suggest that a close above 1.9896 would signal a move to the upside but Dollar buyers may wish to place a stop in the market to protect against an adverse move.

The Euro rallied to yet another record high against the Dollar yesterday and a move above the 1.6000 barrier looks imminent as the diverging interest rate expectations between Europe and the U.S becomes increasingly apparent.

The Federal Reserve are expected to lower interest rates by a further 25 basis points this month while the overwhelming rise in consumer prices means that the ECB are unlikely to reduce rates until the third quarter.

Governing council member, Alex Weber, joined the chorus of calls for tighter monetary policy when he said that the Central Bank must assess whether interest rates are high enough to contain inflation.

The annual pace of inflation rose to 3.6% in March, well above the ECB's 2.0% target and policy makers seem prepared to sacrifice economic growth and maintain price stability.

However, the President of the Central Bank, Jean-Claude Trichet, has expressed growing concerns over the current level of the Euro but Weber said yesterday that there are "some positive signs that the worst may be behind us".

The persistent inflationary pressures and the ECB's hawkish stance on monetary policy has seen the futures market all but price out the possibility of an interest rate cut this year.

However, the intraday movement yesterday saw the Euro relinquish the day's previous gains against the Pound but the diverging interest rate expectations between Europe and the UK means that a shift in trend is unlikely in the near-term.

Therefore, Euro buyers may wish to take advantage of the recent move or at least place a stop order in the market to protect against a further move to the downside.

Despite making widespread gains against most of the major currencies yesterday, the Dollar plunged almost 300 pips against the Pound and the market looks poised for a move above the $2.00 level following a close above 1.9896 last night.

The move came in the aftermath of news that the Bank of England would provide emergency funding to struggling financial institutions while the Dollar was susceptible to a mixed bag of U.S economic data.

Contrary to the tone of the Empire State index earlier this week, manufacturing in the Philadelphia region contracted by the most since 2001. Elsewhere, the weekly jobless report showed that the number of Americans receiving unemployment benefits rose to the highest level in four years, further emphasising the dramatic slowdown in the labour market.

The housing slump has raged on for three years and is eroding consumer confidence while spurring job cuts. The surprising drop in production overshadowed the first increase in the Conference Board's leading economic indicators.

Data Released 18th April

U.K 09:30 PSNCR (March)

written by Adam Solomon