Daily Insight

As we tentatively approach the Bank of England interest rate announcement on Thursday, the Pound came under further pressure yesterday, registering losses against virtually all of the 16 most actively traded currencies amid heightened speculation of a UK interest rate cut this week.

The instability throughout financial markets combined with the deteriorating outlook for the UK economy means that the monetary policy committee have little choice but to lower interest rates despite the Bank highlighting persistent inflationary concerns less than a month ago.

Consumer prices have remained above the Bank's 2.0% target for the past three months and with food and energy prices surging higher policy makers have a difficult balancing act in the month's ahead.

Nevertheless, the dwindling sentiment for the Pound looks likely to continue this week as the Bank of England prepares to cut interest rates to 5.0%. Recent reports have indicated that the credit crunch is spreading to the mortgage market and therefore exacerbating the worst slump in housing since the last recession in 1991.

The Nationwide Building Society, HSBC Holdings plc and the Royal Bank of Scotland Group have raised loans or withdrawn their best offers over the past week in a vain attempt to shore up balance sheets while passing on higher costs to the consumer.

That's negating the impact of two previous rate cuts in the past five months and making it harder for the Bank of England to protect the economy. The Pound slumped against 14 out of the 16 most actively traded currencies and the UK currency has plummeted to a record low versus the Euro this morning with a break below 1.2520 indicating that further downside moves are likely.

By the close of trading last night the Euro stood slightly weaker against the Dollar despite an unexpected upswing in German industrial production, which offset the 0.5% drop in factory orders last week.

Output increased 0.4% from February and rising construction activity is helping production for the third consecutive month. A recent spate of negative economic reports has indicated that the resilience of the European economy will be severely tested over the coming months and that will give the ECB President the flexibility to acknowledge the risks to economic growth.

The ECB are forecast to keep interest rates unchanged this month but the language used in the accompanying statement will be heavily scrutinized for signs that the governing council are beginning ease their staunchly hawkish stance on monetary policy.

However, the Euro has made significant gains against the Pound this morning after comments from ECB officials reminded the market that price stability is still the Central Bank's top priority.

Although the Dollar managed to record modest gains against both the Euro and the Pound yesterday, the dwindling sentiment surrounding the U.S economy has seen Futures traders double bets that the Dollar will slump to $1.65 against the Euro by the start of the fourth quarter.

Despite a relatively positive start to the month, the Dollar declined for four straight days following Ben Bernanke's testimony to Congress last week where the Fed chairman acknowledged for the first time that a recession is possible.

The unexpected drop in U.S non farm payrolls only served to emphasise the Fed's concerns and the Dollar may find little support this week as officials of the Group of Seven nations are due to convene in Washington and are unlikely to agree on a plan to support the dollar.

In terms of economic data, the focus today will undoubtedly fall on the minutes from the last FOMC meeting where policy makers will explain their decision to lower U.S interest rates by 75 basis points.

Data Released 8th April

U.S 15:00 Pending Home Sales (February)

U.S 19:00 Minutes 18 March FOMC Meeting

written by Adam Solomon