Daily Insight

The Pound rose above the $2.00 barrier against the Dollar yesterday and also picked up some unlikely gains versus the Euro despite UK mortgage approvals falling by a third in February as higher credit costs deterred homebuyers.

The report from the British Bankers' Association showed that lenders granted just 43,870 loans last month, down 33% from this stage in 2007. Concerns are growing within the Bank of England that the UK housing slump may deepen further over the coming months as few buyers can afford homes given the tightening credit conditions.

The BoE's monetary policy committee have lowered the benchmark lending rate on two occasions since December but former policy makers, DeAnne Julius, said yesterday that the Central Bank isn't cutting rates fast enough.

In a live television interview, the former MPC member said that the Bank were behind the curve and criticized Mervyn King's handling of the credit crisis, insisting that she would have voted for a 50 basis point cut in April.

The Pound has declined against the majors this morning, dropping under $2.00 versus the U.S Dollar as a report from the Nationwide Building Society showed that UK house prices rose at the slowest pace in over a decade after mortgage rates increased despite a modest drop in interest rates.

In a related article, the Times newspaper reported that Nationwide is planning to turn away business in an attempt to gain greater control over the amount that it lends and is therefore poised to increase rates on tracker deals by more than 50 basis points.

Despite falling interest rates and increased liquidity injections, lenders are reluctant to offer new loans while consumer confidence dwindles and threatens to curtail the pace of economic growth.

Despite making marginal gains against the majors yesterday, the negative sentiment surrounding the U.S economy means that the Dollar is poised to record its biggest weekly decline in a month against the Euro amid speculation that the Fed will lower interest rates by a further 50 basis points.

The U.S currency has fallen 0.7% against the Pound this week and tested the $2.00 barrier on numerous occasions with the focus today falling on the final estimate of regional consumer spending.

The Michigan sentiment index is forecast to decline in March while the Fed's preferred measure of inflation probably increased by smaller amount in February.

The Euro fell for the time in three days against the Dollar yesterday while the single currency also registered losses versus 13 out of the 16 most actively traded currencies amid speculation that the credit crisis will spread to Europe.

One of the region's biggest banks, UBS AG, will probably report a loss this quarter and that prompted ECB policy maker Guy Quaden to comment on the potential impact from a the U.S credit crunch.

The Central Bank have adopted a staunchly hawkish stance on inflation this year but the rising value of the Euro combined with the instability surrounding financial markets may see a change in sentiment over the coming months as a host of lenders will report losses linked to U.S subprime mortgages.

Nevertheless, the medium term outlook suggests that the Euro will break the 1.600 barrier against the Dollar and continue to make gains versus the Pound as ECB fail to express any real concern about the current level of the currency.

Data Released 28th March

U.K 09:30 Gross Domestic Product (Q4)

U.K 09:30 Current Account (Q4)

U.S 12:30 Personal Income (February)

- Consumption

- Coren PCE

U.S 14:00 Michigan Sentiment (March Final)

written by Adam Solomon

The renewed sense of instability surrounding financial markets coupled with the deteriorating outlook for the U.S economy saw the Dollar decline yesterday against almost all of the 16 most actively traded currencies.

The underlying weakness in the U.S currency can also be attributed to speculation that the Fed will lower interest rates by a further 50 basis points next month and that sentiment was echoed in the consumer confidence data released yesterday.

The Conference Board's index slipped to a reading of 64.5 in March, which represents a five year low, while the outlook for the economy plunged to the lowest level since Richard Nixon was President.

The overwhelming decline in consumer confidence will be a major concern to policy makers as declining stock prices and property values limit consumers' ability to spend. A sustained drop in the pace of spending, which accounts for more than two thirds of the economy, would surely invoke the second recession in just ten years while further evidence on the U.S housing market shows that the worst slump in nearly twenty years is showing few signs of abating.

The S&P/Case-Shiller home price index dropped to a reading of 10.7% in February while prices in 20 metropolitan areas fell by the most on record. As the market swells with unsold properties, prices will continue to decline while a substantial rise in foreclosures and tighter lending conditions makes it harder to credit.

The overwhelming appreciation of the Euro continued yesterday as the single currency took advantage of broad Dollar weakness to close last night above the 1.5700 level and further upside momentum is likely today amid the release of the IFO sentiment index.

German business confidence may rise for a third consecutive month in March and provide further evidence that Europe's largest economy is resisting the credit crisis and the surging cost of oil.

The index of confidence is expected to deteriorate as the ECB refuses to alter their stance on monetary policy and the Euro appreciates to record highs against both the Pound and the Dollar.

The revival in Sterling sentiment saw the UK currency break above the $2.00 barrier versus the Dollar last night while the Pound also registered substantial gains against the Euro amid reports that the furore surrounding HBOS plc were severely over exaggerated.

Nevertheless, the medium term outlook is that the Pound will continue to decline against the Euro as the market expects the UK economy to under perform the Euro-zone.

There is a fundamental lack of economic data released this morning so the focus will once again return to risk appetite while U.S data will be the primary driver of Sterling. Nevertheless, the governor of the Bank of England, Mervyn King, has intervened and curtailed any upside momentum for the Pound as he indicated that the Central Bank would begin a series of rate cuts in order to bring some stability to the market.

In a testimony to lawmakers, King said that the Bank is discussing "longer-term" solutions to the credit crisis but will continue to provide emergency funding in the meantime.

Data Released 26th March

EU 09:00 Current Account Balance (January)

EU 10:00 Industrial Orders (January)

GER 09:00 Ifo Index (March)

U.S 12:30 Durable Goods Orders (February)

U.S 14:00 New Home Sales (February)

written by Adam Solomon

Following on from last week, the Pound slumped to a fresh record low against the Euro and also registered sharp losses versus the U.S Dollar, plummeting through the $2.00 barrier amid an increased level of market volatility.

Growing concerns over the economy and dwindling consumer confidence led to speculation that a number of financial institutions, including HBOS plc, will need to seek emergency funding from the Bank of England in order to avert a liquidity crisis.

Sterling sentiment was further hampered as the minutes from the Bank of England's last policy meeting showed that two members of the monetary policy committee actually voted for a cut in UK interest rates this month.

Nevertheless, the Pound recovered some gains against almost all of the 16 most actively traded currencies yesterday following reports that UK retail sales unexpectedly accelerated in February.

According to the report from the Office of National Statistics, sales climbed a whole 1% from the previous month despite forecasts of a 0.2% drop. The surprising rebound in consumer spending will spur economic growth and dispel concerns over a second credit crisis and a declining housing market.

The Bank of England must balance the risks of an economic slowdown against rising inflationary pressures with consumer prices likely to breach 3.0% later this year following the sustained increased in food and energy costs.

The tentative price action surrounding the Euro continued last week as a distinct lack of European economic data saw the market consolidate back towards 1.5500 against the Dollar and alleviate the pressure on the ECB to intervene.

The overwhelming appreciation of the Euro has become a major concern to the ECB's governing council as the single currency rallied to record highs against both the Pound and the Dollar.

In terms of economic data, the Euro failed to find much support on Thursday as growth in Europe's manufacturing and service industries slowed by more than initial forecasts.
A preliminary estimate of the EC index showed that economists growth expectations have been lowered for 2008 and the report provides an indication that the Euro's dramatic increase and record high oil prices will continue to erode growth in the months ahead.

The Dollar has fallen by the most in two weeks against the Euro while the U.S currency relinquished some of the earlier gains versus the Pound despite European money markets being closed for the Easter holiday and an unexpected rebound in existing home sales.

Sales of previously owned homes unexpectedly rose 2.9% in February after six consecutive months of negative home sales and the report will provide some optimism that the Fed's aggressive easing of interest rates will spur a rebound in housing.

Nevertheless, the Dollar has fallen significantly against the Euro this morning and further downside movement is likely as the market anticipates a drop in U.S consumer confidence.

The heightened speculation surrounding the Federal Reserve's next move on interest rates is likely to hamper dollar sentiment while the report this afternoon may show that the decline in confidence exceeded initial forecasts and plunged to lowest level in five years.

Data Released 25th March

U.S 13:00 Case Shiller House Prices (January)

U.S 14:00 Consumer Confidence (March)

written by Adam Solomon

The dwindling sentiment surrounding the Pound continued yesterday as the UK currency declined against all of the 16 most actively traded currencies following the release of the minutes from the Bank of England's last policy meeting.

The dovish tone of the report saw only seven out of the nine member committee voting to keep interest rates on hold this month with the remaining two members recommending a cut.

According to John Gieve and David Blanchflower, the worsening financial crisis and the inevitable effects on the economy warrant a further reduction in borrowing costs while the tone of the accompanying statement suggests that policy makers may be prepared to risk an upside spike in consumer price inflation.

The MPC wasn't going to cut interest rates back-to-back in March because it would send a message to the market that policy makers were more concerned with downside risks to demand at the expense of inflation.

The CPI index showed that consumer prices accelerated in February at the fastest pace in nine months while unemployment fell to the lowest level since 1975. A strong labour market may boost consumer sentiment in the short-term and the Pound may find some much needed support this morning if retail sales exceed expectations in February.

Nevertheless, the ongoing turmoil that's spreading across financial markets led to news that HBOS plc, the largest mortgage provider in Britain, may have liquidity problems after a number of institutions sought emergency funding from the Bank of England.

The resilience of the Euro-zone economy and the ECB's staunchly hawkish stance on inflation saw the Euro hold firm yesterday as policy makers resist calls to intervene amid a declining financial climate and the threat of a U.S led global recession.

The Euro has appreciated 10% in value against the Dollar this year and the single currency made further gains against the majors yesterday despite a growing trade deficit and cautionary comments from a member of the ECB's governing council.

According to Mersch, the European economy will be unable to escape a U.S economic slowdown and the growing concerns over rising credit costs may force the Central Bank into action.

The focus this morning will fall on the Manufacturing and Services PMI and the report will provide some insight as to whether the economy has been affected by the latest financial crisis.

Despite the Fed's decision to slash interest rates by a further 75 basis points on Tuesday, the Dollar smashed through the $2.00 barrier versus the Pound yesterday and a close well underneath this level suggests that further downside movement could be likely.

Considering the instability across financial sector at present, the increased appetite for risk aversion dominates the currency market as U.S interest rates drop to 2.25% this week and the Dollar makes gains against all of the higher-yielding currencies.

Nevertheless, the overall sentiment surrounding the economy has not changed and the Dollar is likely to record further losses in the short-term as the Philly Fed manufacturing survey and an index of leading economic indicators are expected to show a sharp deterioration in the economy and in the stock market.

Data Released 20th March

U.K 09:30 PSNCR (February)

U.K 09:30 Retail Sales (February)

E.U 09:00 Flash PMI - Manufacturing (March)

- Services

U.S 13:30 Initial Jobless Claims (w/e 14th March)

U.S 14:00 Leading Indicators (February)

U.S 14:00 Philly Fed Index (March)

written by Adam Solomon

In the build up to the FOMC rate decision last night, the Dollar extended its losses against the Euro and also slumped to 2.0200 versus the Pound amid speculation that policy makers would slash interest rates by a whole percentage point in an attempt to restore some confidence to the market.

The demise of the U.S securities firm Bear Stearns sent shockwaves through the market earlier this week and that news coincided with the Fed's decision to lower the discount lending rate to just 3.5%.

This was just the latest attempt for the Fed to restore some sense of stability and last night the FOMC actually cut interest rates by 75 basis points, which means the Dollar is now the second lowest yielding currency in the developed world.

Nevertheless, the outcome of the meeting and the Fed's decision to resist cutting rates by a whole percentage point prompted a 400 point rally in equities while the Dollar made gains against both the Pound and the Euro.

The tone and language used in the accompanying statement suggests that policy makers are still downbeat on the prospects for the economy but the rising inflationary pressures are a major concern.

That sentiment was reflected in the voting pattern of the decision as two members of the FOMC voted for a smaller reduction. Even though the Fed are likely to continue monetary easing over the coming months, the threat of inflation will probably lead to a more conservative series of cuts as the market needs to time to absorb the recent moves.

The Euro has risen to within a whisker of the 1.6000 level against the Dollar this week but the single currency sold off in the aftermath of the FOMC rate decision as the Reserve Bank cut rates by less than anticipated.

Nevertheless, the overall sentiment surrounding the European economy combined with the staunchly hawkish stance of the ECB suggests that this move reflects traders adjusting positions rather than a shift in sentiment.

In a recent interview, the chairman of the Central Bank, Jean-Claude Trichet, saw fit to remind the market that risks to price stability are still the ECB's chief concern and despite the turbulence surrounding financial markets, the outlook for the Euro-zone is still promising compared to that of the U.S.

The Pound made strong gains against the Dollar yesterday while the UK currency also stemmed any further losses versus the Euro as a report from the Office of National Statistics showed that the UK inflation had accelerated at the fastest pace in nine months.

Consumer prices climbed 2.5% in February, compared with 2.2% the previous month as a significant increase in gas and electricity prices limit the Bank of England's scope to cut interest rates.

The annual pace of inflation has now exceeded the Bank's target for five months in a row and the governor of the BoE, Mervyn King, believes that consumer prices will continue to accelerate over the coming months.

The MPC now face a dilemma in balancing the risks of higher inflation against a slowing economy and speculation of further monetary easing has sent the Pound crashing to a record low versus the Euro.

The focus this morning will inevitably fall on the minutes of the BoE's last policy meeting where the committee are expected to vote 8-1 in favour of holding interest rates steady.

Data Released 19th March

U.K 09:30 BoE MPC Minutes of 5/6 March Meeting

U.K 09:30 Average Earnings (3 months to January)

U.K 09:30 Claimant Count Unemployment (February)

U.K 10:00 CBI Industrial Trends Orders

E.U 10:00 Trade Balance (January)

written by Adam Solomon

The overwhelming decline in Sterling sentiment saw the Pound crash to fresh record low against the Euro yesterday as UK stocks tumbled by the most in two years following reports that the fifth largest U.S securities firm fell into liquidation.

The level of volatility surrounding financial markets at present has prompted investors to seek lower yielding currencies amid an increased appetite for risk aversion. The Pound also slumped against the Dollar as the Fed's decision to lower the discount lending rate in an emergency meeting over the weekend showed that the ongoing financial crisis is worsening.

The negative sentiment surrounding the Pound is likely to continue today as the impact of the U.S led credit crunch dampens confidence and threatens to curtail the pace of UK economic growth.

In terms of economic data, the focus this morning will fall on the latest round of inflationary data as consumer prices are forecast to be strong given the rise in BRC shop and producer prices.

Despite the ongoing financial crisis and the possible implications on the Euro-zone economy, the Euro rose to within just a point of the 1.6000 level versus the Dollar while also pairing record gains against the Pound as the ECB remain seemingly undeterred with the rising value of the single currency.

Nevertheless, in a recent interview the President of the Central Bank, Jean-Claude Trichet, expressed concerns over sharp and excessive moves in the currency market and it will be interesting to gauge the Central Bank's response should the Euro break the 1.60000 barrier versus the Dollar.

The European Central Bank's top priority is inflation and managing the potential risks to price stability because the Euro has only appreciated 10% against the Dollar over the past two months and a strong currency is cushioning the effects of high commodity prices.

The Dollar fell for a fifth straight day against the Euro and failed to breach the $2.0000 barrier versus the Pound as speculation intensifies that the Federal Reserve will reduce interest rates by a full percentage point this evening in the latest attempt to restore confidence to the market.

The demise of Bear Stearns sent shockwaves through the market yesterday and that could prompt the Fed to implement the biggest interest rate cut for over 23 years, reflecting the severity of the U.S economic slowdown.

The focus this evening will surely switch to the FOMC rate decision but in terms of economic data, the Dollar may struggle to find any support as a government report is expected to show that U.S housing starts fell to the lowest level in 17-years last month.

The worst housing slump for nearly twenty years is showing no signs of recovering and despite interest rates falling to 3.0%, falling property values and tighter lending conditions will do little to boost confidence.

Data Released 18th March

UK 09:30 Consumer Price Index (February)

- RPI

U.S 12:30 Housing Starts (February)

U.S 12:30 Producer Price Index (February)

- Ex Food & Energy

U.S 18:15 FOMC Rtae Decision

written by Adam Solomon

The Pound has fallen by the most in six years against the Euro this morning and to the lowest level on record after news broke that the Federal Reserve has cut its discount lending rate in an emergency meeting over the weekend.

The Pound also tumbled against the Dollar this morning, testing the support around the $2.00 barrier as UK stocks slumped to the lowest level in two years and signalled that the ongoing financial crisis is worsening.

That sentiment was reflected in the actions of the Bank of England who announced that emergency funds will be made available for the first time in six months to alleviate tensions in the financial sector.

In terms of economic data, the Pound may struggle to rebound from the record lows against the Euro as the focus this week switches to the CPI estimates tomorrow. The annual pace of inflation is expected to exceed the BoE's target for a fifth straight month in February but the Bank of England may need to cut interest rates in an attempt to bring stability to the market.

The Euro charged to yet another record high versus both the Pound and the Euro over the weekend and the single currency looks set to make further gains as the ECB maintain a hawkish stance on inflation while other Central Banks begin a series of cuts.

The resilience in the Euro-zone economy has been highlighted with a strong employment report on Friday while the annual pace of growth in unit labour costs accelerated to 2.7%, the fastest rate in nearly two years.

Far more critical to the outlook of the ECB's monetary stance was the surprising upturn in both headline and core inflation to 3.3% in February. This represents the fastest pace since 1993 and vindicates the ECB's staunchly hawkish stance on inflation and the need to monitor risks to price stability closely over the coming months.

The increased sense of volatility surrounding financial markets has prompted the Federal Reserve to cut interest rates repeatedly this year and even an injection of up to $200 billion couldn't prevent another emergency meeting over the weekend as the Fed struggle to prevent a financial meltdown.

In the first emergency weekend meeting for almost three decades, the Reserve Bank cut the rate on direct loans to just 3.25%. News also broke that the Fed will provide $30 billion to help JPMorgan Chase & Co finance the purchase of Bear Stearns after a run of America’s fifth-largest securities firm.

The desperate actions of the Fed in a vain attempt to bring some stability to the market is just the latest step to try an alleviate the seven month credit crunch but the Reserve Bank is in danger of losing the confidence of the American public.

Data Released 17th March

EU 10:00 Final HICP (February)

U.S 12:30 Consumer Price Index (February)

- Ex Food & Energy

U.S 12:30 Real Earnings (February)

U.S 13:55 Michigan Sentiment (March Prelim)

written by Adam Solomon

The increased level of volatility surrounding the Pound continued yesterday as the UK currency staged a strong intraday reversal against the Dollar and remained almost unchanged versus the Euro despite the distinct lack of UK economic reports.

The heightened inflationary concerns have all but diminished the prospect of an aggressive easing of interest rates and that has helped Sterling rally to highest level in 3 months versus the Dollar.

That sentiment was echoed in a survey by the Bank of England yesterday where Briton's inflation expectations rose to the highest level in at least eight years and added to the case for pause in monetary easing.

Consumer prices are forecast to increase at an annual pace of 3.3% in the next year, up from 3% in the last quarter and the highest result since 1999. Soaring food and energy costs have pushed up prices while the current level of inflation has exceeded the BoE's target for the past four months.

Oil prices have increased to a record level this week, touching a high above $109 per barrel and pushing higher costs on to the consumer. A number of Bank of England officials have echoed these concerns on inflation, which is in stark contrast to the tone of the Chancellor's first budget speech on Wednesday.

Alistair Darling stated that the UK economy is "resilient" and inflation rates remain "low" but in a consumer survey just 30% of respondents were satisfied with the way the Bank of England is setting interest rates and controlling inflation.

The overwhelming strength in the Euro combined with broad Dollar weakness saw the single currency rally to a fresh record high yesterday and further gains are likely this morning amid the release of the harmonised index of European consumer prices.

The chairman of the ECB Jean-Claude Trichet has reiterated his concerns over excessive exchange rate movements but despite the undeniable impact on Euro-zone export growth, the governing council are still more concerned with the threat of inflation.

In an interview yesterday, Trichet said that if the ECB failed to ensure price stability, it would cause further market turmoil and a crisis in consumer confidence.

In other words, the ECB's governing council is unlikely to intervene in the near-to-medium term but should the Euro breach the 1.6000 barrier versus the Dollar, the subsequent impact on export growth would risk an economic slowdown.

The Dollar came under further pressure yesterday, dropping to a decade low versus the Yen and falling to the lowest level on record against the Euro amid reports that the hedge fund struggled to meet its margin calls last week and now faces outright liquidation.

The news triggered a sharp drop in U.S stocks and despite the Fed's efforts to bring stability to the market by injecting $200,000 in liquidity, a further 75 basis point cut seems inevitable next week.

The Federal Reserve have lowered interest rates to 3.0% over the past six months and even with consumer prices expected to increase in the report this afternoon, Fed Fund futures are currently pricing in a 94% probability of 75 basis point reduction on the 18th March.

Data Released 14th March

EU 10:00 Final HICP (February)

U.S 12:30 Consumer Price Index (February)

- Ex Food & Energy

U.S 12:30 Real Earnings (February)

U.S 13:55 Michigan Sentiment (March Prelim)

written by Adam Solomon

The Pound continued the upward momentum against the Dollar yesterday, rising to the highest level in three months at 2.0353 while the UK currency also snapped a two-day losing streak versus the Euro after the UK trade deficit narrowed by more than expected.

The overall weakness in Sterling pushed up exports to the highest level in 18-months while the gap in trade shrank for the second month in a row and the report indicates that net trade may support economic expansion this year.

The ongoing crisis in credit threatens to weigh on consumer spending and the Bank of England is relying on a weaker Pound to encourage exports and offset a decline in retail sales.

Sterling has dropped almost 8% in value over the past six months as the collapse of the U.S subprime mortgage market prompted bank losses and write-downs totalling $190 billion to date.
The subsequent impact on consumer and business sentiment is expected to slow the UK economy to an annual pace of 1.6% in the fourth quarter of 2008, matching the weakest rate since 1993.

The Chancellor of the Exchequer Alistair Darling delivered his maiden budget yesterday and the tone of his statement seemed to indicate that the economy would benefit from further monetary easing.

Nevertheless, the Pound stood firm and finished the day virtually unchanged against the Euro despite renewed speculation of an April rate cut.

The overwhelming strength of the Euro continued yesterday as the single currency rose to a fresh record high against the Dollar, closing above the psychologically important 1.5500 level amid hawkish commentary from a number of ECB officials.

The continual rise in oil prices combined with a drop in U.S credit spending have contributed to the Dollar's decline while the ECB President, Jean-Claude Trichet, gave a speech with the Gulf Cooperation council.

In his statement, Trichet repeated his distaste for excessive moves in the currency market but warned that it is very important for the Central Bank to anchor inflation expectations.

Despite the strength of the Euro and the possible implications to the economy, the ECB are still more concerned about inflation and determined to act to ensure that risks to price stability do not materialise.

As a result, the positive momentum surrounding the Euro is likely to continue over the coming weeks as a barrage of positive economic reports provide some optimism that the Euro-zone economy will withstand a U.S led economic slowdown.

The ailing U.S Dollar fell to a record low against the Euro yesterday and stood just a few pips above an 8-year low versus the Japanese Yen as the latest downside move in the currency and bond markets suggests that traders are suspicious of the Fed's actions on Tuesday.

Initially, the market reacted positively to news that the Fed, in conjunction with other Central Banks, will inject $200 billion in liquidity into the banking system to provide some relief to financial institutions.

Fed Fund Futures indicated that that the FOMC will resist another substantial interest rate cut this month but yesterday traders were pricing in a 74% probability of a 75 basis point reduction on the 18th March.

As a result, the Dollar has fallen heavily against the majors and that trend looks set to continue today as U.S retail sales probably declined in February following a significant increase in food and energy costs.

Data Released 13th March

EU 08:00 ECB Monthly Bulletin Published

U.S 12:30 Import Prices / Export Prices (February)

U.S 12:30 Initial Jobless Claims (w/e 7th March)

U.S 12:30 Retail Sales (February)

U.S 14:00 Business Inventories (January)

written by Adam Solomon

The Pound struggled against the majors for a second day in a row yesterday as a barrage of mixed economic data renewed concerns that the UK economy is slowing as the RICS house price balance came in much lower than expected.

According to a report from the Royal Institution of Chartered Surveyors, the number of residential property agents reporting falling prices exceeded initial forecasts and declined by the most since June 1990 while the balance of the report was the worst since May 2003.

The recent turbulence surrounding financial markets and the impact from the U.S subprime mortgage crisis has led to tighter lending conditions and that threatens to curtail the decade long housing boom and contribute to a sharp downturn in growth.

Just last month the U.K's most profitable homebuilder, Bovis Homes Group plc, publicly urged the Bank of England to take "decisive action" and lower interest rates from the current 5.25%.

However, the recent pickup in the BRC sales monitor continued in February while a separate report on house prices showed a rebound in certain areas of the country.

The Pound may receive some support this morning following the release of the UK trade balance where the deficit between goods and services is expected to narrow in January.

Despite the surprisingly dovish rhetoric from the ECB President, Jean-Claude Trichet, the Euro hit back yesterday and soared to a fresh record high against the Dollar following reports of a sharp improvement in German investor confidence.

The ZEW Centre for European Economic Research reported that its index of investor and analyst expectations unexpectedly rose for a second consecutive month in March. The Euro peaked at 1.5496 against the ailing U.S Dollar and also made further gains versus the Pound as the report only added to recent evidence that Europe's largest economy is coping with the Euro's appreciation and a U.S economic slowdown.

The positive momentum surrounding the Euro continued as ECB governing council member Axel Weber said that there is no room for the Central Bank to lower interest rates.

Nevertheless, the ECB has expressed concerns over a strong Euro and the impact on the economy and yesterday the Central Bank intervened by letting the Federal Reserve provide as much as $200 billion of liquidity into the financial system and agreed to lend up to $15 billion in joint action with the Fed.

By the close of trading last night, the Dollar clawed back some gains against the Euro and also rebounded versus most of the major currencies amid reports that the Federal Reserve will extend $200 billion of credit to financial institutions in order to boost lending and steer the economy away from a recession.

The market took the news very positively and the U.S Dollar subsequently rallied as speculation intensified that the Fed won't slash interest rates by a further 75 basis points this month.

The news that the Fed will provide limitless funds of Treasuries in exchange for debt including slumping mortgage-backed securities is an indication that the Reserve Bank is fiercely dedicated to preventing a recession and an injection of liquidity combined with falling interest rates may encourage lending.

In terms of economic data, the Dollar also received support as news broke that the U.S trade deficit was smaller than forecast in January as a weaker dollar increased demand for U.S made goods.

Data Released 12th March

UK 12:30 Budget Speech

UK 09:30 Trade Balance (January)

EU 10:00 Industrial Production (January)

U.S 18:00 Federal Budget (February)

written by Adam Solomon

The recent revival in Sterling sentiment was cut short yesterday as the UK currency paired losses against both the Euro and the Dollar following a mixed bag of economic data.

The overwhelming rise in food and energy costs saw UK factory-gate inflation match the fastest annual pace since 1991 while a separate report showed that manufacturing also rose by more than initial forecasts, which all but diminishes the prospect of a further Bank of England rate cut in April.

Producer prices increased at an annual pace of 5.7% in February as the cost of raw materials spiralled out of control and increased by the most since records began in 1986.

The monetary policy committee have the unenviable task of balancing the upside risks to price stability against a slowing economy but with inflation expected to exceed the 3% barrier later this year, the Bank may not have the scope to reduce interest rates as aggressively.

However, the Pound declined 0.2% against the Euro at the close of trading last night and further downside movement may be forthcoming amid fresh reports that the UK housing slump deepened in February.

According to a report from the Royal Institution of Chartered Surveyors, house prices fell by the most in 18-years and to the worst level since the eve of the last recession.

The Euro's dramatic appreciation against the Dollar this year has seen the pair rally beyond the 1.5000 barrier over the past week and that has caused great concern within the European Central Bank as the chairman, Jean-Claude Trichet expressed yesterday morning.

In a statement to reporters in Switzerland, Trichet said that he was concerned about excessive moves in exchange rates and his opposition to brutal fluctuations may alter the ECB's relentlessly hawkish stance on inflation and recognise the possible impact on economic growth.

The Euro fell as much as 0.3% against the Dollar in the aftermath of the statement but Trichet's ability to weaken the Euro is limited as the economic reports point to further upside risks to price stability.

In terms of economic data, the Euro may struggle to recapture the momentum against the Dollar as the focus switches to the ZEW survey on German investor confidence. The index is expected to fall in March amid concerns that the U.S recession will eventually spread to Europe.

The Dollar has struggled to consolidate on the gains made against the majors over the past month and the dire outlook for the U.S economy has seen the Federal Reserve slash interest rates aggressively since December and further monetary easing is likely in March.

Nevertheless, the U.S currency rebounded against both the Euro and the Pound yesterday amid speculation that the trade balance report this afternoon will show that the deficit in goods and services actually shrank in January as a weaker Dollar made U.S made goods more attractive.

However, oil futures closed above $107 a barrel last night and rising energy costs will feed into inflation and threaten the pace of economic expansion. The CPI report on Friday will probably show renewed risks to inflation as food prices have also risen by as much as 50% over the past two years with retailers refusing to absorb rising costs.

Data Released 11th March

UK 09:30 DCLG House Prices (January)

GER 10:00 ZEW Index (March)

U.S 12:30 Trade Balance (January)

written by Adam Solomon

Following on from last week, the diverging interest rate expectations between Europe and the U.S saw the Dollar plunge to a fresh record low against the Euro while also breaching the 2.00 level versus the Pound as the FOMC slash interest rates by a further 125 pips in the month of February. In addition, the weakening sentiment surrounding the U.S labour market further emphasized the problems within the economy as Nonfarm payrolls dropped for a second consecutive month and the Fed announced plans to pump $200 billion into the banking system to address liquidity pressures. The timing of the announcement was certainly suspect as it coincided with the weak U.S employment report and may have been designed to prevent a Nonfarm payrolls induced collapse in the stock market. The severity of the decline in the labour market combined with the rise in jobless claims indicates that the U.S economy is already in the midst of a recession and a sharp drop in retail sales will also weigh heavily on dollar sentiment. Despite a considerably weaker currency, the U.S trade deficit is not expected to show any improvement for the month of January while higher commodity prices will hit the import side and push up inflation.

Despite the fundamental lack of UK economic data, the positive sentiment surrounding the Pound saw the currency soar to a year to date high against the U.S Dollar while the Pound also rallied versus the Euro despite a host of positive economic reports coming out of the Euro-zone. The renewed price action surrounding Sterling suggests that the market is anticipating higher inflation numbers this morning with the PPI index heading higher following the rise in food and energy costs. The focus this week will undoubtedly fall on Wednesday’s budget presentation where the Chancellor, Alistair Darling, will have limited to scope to boost economic activity. The Pound is likely to continue the upward momentum against the majors this week as rising inflationary pressures and a rebound in retail sales keeps the Bank of England from cutting interest rates too aggressively over the coming months.

The Euro smashed through the 1.5000 barrier against the Dollar to record a high of 1.5463 last week following a combination of weak U.S employment data and hawkish commentary from the European Central Bank leads to speculation that the economy will survive a U.S led economic slowdown. The contrast in sentiment was further emphasized by the events that preceded the monthly U.S job report while the ECB are not particularly concerned with containing liquidity pressures and governing council member, Alex Weber, even warned that the market is underestimating the upsides risks to inflation. The Euro will probably make further gains against the ailing U.S Dollar this week as the focus switches to the harmonized consumer price index on Friday with the gauge expected to confirm the trends above 3.2%.

Data Released 10th March

UK 09:30 Producer Price Index (February)

U.K 09:30 Industrial Production (January)

U.S 14:00 Wholesale Inventories (January)

written by Adam Solomon