Daily Insight

The Pound failed to rally against the majors today, dropping back under 1.9500 versus the Dollar, despite a surprisingly positive report on the UK housing market, which showed that prices actually rose 1.2% in May as homeowners refused to succumb to the worsening market environment.

According to the report from Rightmove plc, the average selling price for a home in Britain rose to £242,500 this month with prices rising to 2.2% on the year but the property website warned that the increase was because homeowners were not realistic about the current state of the UK housing market.

The Bank of England have slashed interest rates on three occasions since December and the Governor, Mervyn King, has recently said that prices are set to fall further as the crisis in credit deepens.

In the statement that followed the BoE’s quarterly inflation report, King painted a gloomy picture for the UK economy going forward and said that the decade long economic boom is coming to an end.

Home values have dropped for the first time since 1996 as lenders impose tightening lending conditions and raise mortgage rates to the highest level in eight years. However, the Bank of England can’t afford to cut interest rates any further as inflation threatens to spiral out of control after rising to the government’s 3.0% limit in April.

The declining sentiment surrounding the Euro-zone economy saw the Euro fall against the Dollar this morning while the single currency also failed to rally against the Pound despite yet another round of hawkish commentary from ECB officials.

The President of the Central Bank, Jean-Claude Trichet, thought it was necessary to remind the market about the dangers of rising inflation and likened the recent surge in food and energy prices to the shocking rise in oil during the 1970s.

Aside from the resilience of the German economy, many areas of the Euro-zone have been struggling to cope with higher prices but Trichet believes that a rate cut now could lead to more serious problems going forward.

The price action surrounding the Euro in the aftermath of his comments seems to suggest that traders are becoming immune to the seemingly endless stream of hawkish statements from ECB officials while the worsening economic data indicates the gradual decline of the Euro-zone economy.

Nevertheless, the Euro may find some support against the Pound in the morning as German producer prices may show upside risks to price stability that somewhat vindicate the Central Bank’s hawkish stance on inflation.

The renewed sense of stability surrounding the U.S economy saw the Dollar make further gains against the Pound while also rising by the most in four days versus the Euro after an index of leading economic indicators unexpectedly rose in April.

The Conference Boards’s index increased 0.1% to record the first month-on-month gain since October 2006 and the Dollar rallied amid speculation that the economy has pulled back from the brink of recession.

The report vindicates Hank Paulson’s claim that the U.S economy is through the worst of the credit slump but a recent statement from the chairman of the Federal Reserve, Ben Bernanke, reminded the market that further market volatility may undermine the future outlook for economic growth.

Data Released 20th May

GER 10:00 ZEW Index (May)

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

- Ex Food & Energy

written by Adam Solomon