The Pound initially declined against the Euro yesterday, dropping to the lowest level in a week, while the UK currency also revisited the trend support at 1.9850 versus the Dollar after a report from Hometrack Ltd showed that house prices fell in July by the most in at least seven years.

The average cost of a home in Britain plummeted 4.4% from this stage in 2007 to £168,500 as the index recorded the biggest annual drop in prices since records began in 2001.

The accompanying statement from the London-based research company suggested that house prices will remain suppressed over the coming months with prices likely to fall further in the Autumn.

The fallout from the credit crisis has forced banks and lenders to limit their best offers while also increasing mortgage rates well in excess of the base rate.

Rising inflationary pressures have limited the Bank of England’s scope to lower interest rates and with consumer prices expected to breach 4% in July, some policy makers may be leaning towards a tightening bias even at the risk of a recession.

Nevertheless, the Pound bounced back against the Dollar later in the session after crude oil prices increased following reports that Shell reduced Nigerian production because of militant attacks on pipelines.

In terms of economic data, the Pound will be susceptible to reports that UK mortgage approvals dropped to 37,000 in June, from 42,000 the previous month to signal further weakness in the housing market.

The Euro took advantage of broad Dollar weakness yesterday but failed to hold on to earlier gains versus the Pound after a gauge of German consumer sentiment showed that confidence in Europe’s largest economy dropped to lowest level in over five years.

Record high energy costs have forced manufacturers to pass on higher prices to the consumer as inflation accelerated to 3.4% in Germany last month and eroded the outlook for economic growth.

The recent Ifo sentiment index showed that business confidence in the region had slumped by the most since the September 11th terrorist attacks while the ZEW survey for investor confidence dropped to the lowest level on record.

The report yesterday is just the latest indication that growth in the European economy is slowing and the Euro may struggle to gather momentum this week amid the release of the EC business and consumer confidence surveys.

The Dollar again failed to break the major support at 1.9850 versus the Pound and also suffered a strong intraday slide versus the Euro amid concerns that U.S financial company losses will widen further and reduce the probability of an increase in U.S borrowing costs.

The Dollar declined for a second day against the majority of the major currencies after Fed policy maker, Gary Stern, told the Financial Times that the credit crunch will get worse, slamming suggestions that the economy will bounce back towards the end of 2008.

Elsewhere, the Dollar failed to find any support amid reports that the Nigerian militant group MEND (Movement for the Emancipation of Niger Delta) claimed responsibility for an attack on Nembe Creek trunk pipeline and increased concerns over production in the region.

Elsewhere, the Iranian President, Mahmoud Ahmadinejad, was reported as saying that the Middle East’s second-largest oil producer has 6,000 uranium-enriching centrifuges.

The simmering tensions between Iran and Israel helped to lead oil prices to a record high earlier this month and concerns over supply saw prices increase 1.2% in New York.

The Dollar will again be susceptible to volatility in stock and commodity markets today and the U.S currency may also come under further pressure as an index of house prices is forecast to fall 16% in May.

Data Released 29th July
U.K 09:30 Consumer Credit (June)
U.K 09:30 Mortgage Applications (June)
U.K 11:00 CBI Distributive Trades Survey (July)

U.S 14:00 Case-Shiller House Prices (May)
U.S 15:00 Consumer Confidence (July)