Daily Insight

Despite a host of negative economic reports, the Pound staged an unlikely rally yesterday amid reports that HBOS PLC plan to announce a £4 billion rights issue that is designed to help the bank bolster its balance sheet.

As we build up to the Bank of England interest rate announcement next week, the Pound has been susceptible to a barrage a weak data that has increased speculation of a back to back rate cut in May.

The minutes from the Bank’s last policy meeting showed that six out of the nine policy makers, including the governor, Mervyn King, favoured a 25 basis point reduction in rates. However, house prices have fallen 2.5% in just a month and a report yesterday from the Nationwide Building Society showed the first annual decline in prices since 1996.

The credit crunch has weighed heavily on the UK property market and tighter lending conditions has seen Banks approve the fewest number of new loans since records began in 1999.
Just one member of the BoE’s monetary policy committee favoured a greater 50 basis point reduction in April and yesterday David Blanchflower said that house prices may fall by a third over the next year while consumer confidence fell to the lowest level since 1992.

The speculation surrounding the May interest rate announcement may see the Pound come under further pressure in the short-term and Euro buyers would be placed to take advantage of the current rate or at least place a stop order in the market to prevent a further move to the downside.

The Euro is poised to record its first weekly decline against the Dollar since February while the single currency has also lost significant ground versus the Pound amid suggestions that the ECB may finally acknowledge the risks to growth as cracks begin to appear in the Euro-zone economy.

Business and consumer confidence has deteriorated in the month of April and consumer prices dropped beyond expectations in Germany, suggesting that inflation is beginning to subside in Europe’s largest economy.

The EC business climate index showed that confidence had declined to a two year low in April as the Euro’s unrelenting appreciation combined with record high food and energy costs threaten the pace of economic growth.

The Euro-zone has been largely resilient to the fallout from the U.S subprime mortgage collapse but the latest figures suggest that consumers and companies are beginning to struggle with higher credit costs.

The European Central Bank have so far remained defiant in their staunchly hawkish stance on inflation but the tone of the next press conference will be of particular interest as speculation builds of exactly when the Central Bank will implement a rate cut in order to provide some relief to the financial system.

The tension surrounding the FOMC rate decision saw the Dollar trade in a very tight range against the Euro yesterday while the U.S currency again bounced off the trend support at 1.9650 versus the Pound as the focused switched to the evening announcement.
The recent revival in Dollar sentiment had been largely due to speculation that the Fed would refrain from lowering interest rates in April and keep the benchmark lending rate on hold at 2.25%.

The FOMC did indeed cut rates by a further 25 basis points last night but the Dollar failed to decline as the market appeared disappointed that the Reserve Bank did not implement a more aggressive cut.

However, the accompanying statement would always be heavily scrutinised as the tone and language of the report seemed to suggest that the Fed had done its job in lowering rates to shore up the future outlook for the economy.

Two members of the Fed’s Open Market Committee elected to keep rates on hold this month while an entire commentary on the downside risks to growth was completely removed from the statement.

The Dollar has remained largely unchanged in the aftermath of the announcement but the focus will now switch to the monthly U.S job report on Friday with unemployment expected to increase to 5.2%.

Data Released 1st May
U.K 09:30 CIPS Manufacturing PMI (April)
U.K 09:30 Financial Stability Report
U.S 13:30 Jobless Claims (w/e 25th April)
U.S 15:00 Construction Spending (March)
U.S 15:00 ISM Manufacturing (April)

written by Adam Solomon