Daily Insight

The Pound was once again susceptible to a barrage of weak economic reports as the UK currency fell towards the trend support at 1.9650 versus the Dollar after another gloomy report from the Bank of England.

UK mortgage approvals declined in March to the lowest level in almost a decade as banks and lenders withdrew their best offers and imposed tightening borrowing restrictions.

Banks only granted 64,000 loans for home purchases last month compared to 72,000 in February and the result was the lowest since records began in 1999.
The Bank of England has offered to swap government backed bonds for mortgage securities in the In a bid to boost the ailing housing market and provide some relief to the financial system.

The report on mortgage approvals yesterday really emphasises the degree of uncertainty surrounding the housing market at present as net lending on homes plummeted to just £6.9 billion, the lowest in three years.

The Pound came under further scrutiny yesterday as a separate report from the Confederation of British Industry showed that consumer spending dropped to the lowest level since November 1992 as falling homes values restricts consumer spending.

Oil prices have risen to a record high above £119 a barrel but despite the mounting inflationary pressures, the Bank of England could be forced into a back-to-back rate cut in May.

The governor of the BoE, Mervyn King said yesterday that inflation will hold near 3.0% for longer than initially anticipated but this hawkish commentary conflicts with the sharp drop in mortgage approvals and decline in consumer sentiment.

The Euro has been struggling against the majors in recent weeks as weakening economic reports indicates that the Euro-zone is no longer immune to the threat of a U.S led recession.

Deutsche Bank, Germany's largest back, reported its first quarterly loss in five years while European retail sales plunged to the lowest level on record as sales across Germany and France fell into contractionary levels.

Record high food and energy costs are affecting sentiment while the measure of sales growth in the Euro-zone fell for a second consecutive month. The fastest pace of inflation in 16-years is squeezing margins and weighing on spending while at the same time discouraging the ECB from cutting interest rates.

The mini revival in Dollar sentiment continued yesterday as the U.S currency rallied against the Euro and made further gains versus the Pound as we build up to the FOMC rate decision tonight.

The Federal Reserve's open market committee face a difficult balancing act amid deteriorating economic growth and rising inflationary pressures. The positive momentum surrounding the Dollar can be attributed to speculation that the Fed will keep rates on hold this month after early forecasts of a 25 basis point cut.

In addition, the Dollar may struggle to make further gains as a report this afternoon may show that the U.S economy grew at the slowest quarterly pace in five years and consumer spending faltered and the housing slump worsened.

Data Released 30th April

UK 10:30 Gfk Consumer Confidence (April)

EU 10:00 Business Climate (March)

EU 10:00 Economic Sentiment (April)

- Industrial / Services / Consumer

EU 10:00 Harminosed Consumer Prices Flash (April)

EU 10:00 Unemployment (March)

U.S 13:30 ADP Employment Index (April)

U.S 13:30 Employment Cost Index (Q1)

U.S 13:30 Advance GDP / Deflator (Q1)

U.S 14:45 Chicago PMI (April)

U.S 19:15 FOMC Rate Decision

written by Adam Solomon

The recent revival in Sterling sentiment was severely tested yesterday as the UK currency was once again susceptible to weak economic data as UK house prices fell by the most in three years this month.

The average cost of a home in Britain decreased 0.6% from March, the most since December 2004, to £173,100 as tightening credit conditions and concerns that the property slump is worsening deterred homebuyers.

Compared to this stage in 2007, house prices have declined 0.9% as a surge in borrowing costs prompted banks and lenders to withdraw their best mortgage offers.

Falling home values is weighing heavily on confidence while a downturn in spending has seen the economy grow at the slowest pace since the first quarter of 2005.

According to a statement from Hometrack Ltd, "weak confidence is effectively resulting in a buyers strike" while the current downward trend on prices will only begin to subside once stability returns to financial markets and the economic outlook improves.

In the aftermath of the report, the Pound declined against most of the 16 most actively traded currencies and UK government bonds rose as speculation increased that the Bank of England will continue cutting interest rates.

Nevertheless, the Pound actually paired gains against both the Pound and the Euro by the close of trading last night but the UK currency may struggle to hang on to those gains amid the release of a report on Mortgage approvals this morning.

The Euro has fallen to a three week low against the Dollar and has posted heavy losses versus the Pound in recent trading sessions as a strong currency hurts exports and threatens the future outlook of the European economy.

The single currency has risen almost 10% in value against the Pound this year but there are some signs that we have reached the bottom of this move after a fairly robust rally over the past week.

Euro sentiment was further hampered yesterday as inflation in Europe's largest economy actually slowed by more than initial forecasts in April. The annual pace of inflation in Germany fell to an astonishing 2.6% this month from 3.3% in March.

Although the figure won't suddenly alleviate the ECB's concerns on inflation, the report may have a bearing on future policy and force the Central Bank to acknowledge the downside risks to economic growth by joining the BoE and the Federal Reserve in cutting interest rates.

The recent price action surrounding the Dollar suggests that the U.S currency may extend its recent upside move against the Euro as the focus switches to the FOMC rate decision tomorrow evening.

The market has been growing increasingly confident that the Federal Reserve will only implement a 25 basis point reduction but a recent upturn in economic data has provoked speculation that the Open Market Committee will remain on hold this month.

Although there has been no official comments from Fed officials, the continual and aggressive rise in oil and commodity prices will be stoking inflation and may convince the Fed chairman, Ben Bernanke, to put the brakes on any further monetary easing.

However, a sharp rise in the price of oil will see fuel prices increase while falling home values are weighing heavily on consumer confidence. The Dollar may struggle against the Pound this afternoon as the Conference Board's index of confidence probably fell to the lowest level since October 1993.

Data Released 29th April

UK 09:30 BoE Mortgage Approvals (March)

UK 09:30 Consumer Credit (March)

UK 11:00 CBI Distributive Trades Balance (April)

U.S 14:00 Case / Shiller House Prices (February)

U.S 15:00 Consumer Confidence (April)

written by Adam Solomon

Following on from last week, the Pound took advantage of broad Euro weakness to consolidate above the 1.2500 level on Friday after an EU report showed that money supply into the Euro-zone gre less than anticipated in March.

The European Central Bank rely on the M3 index as a gauge of inflation and the 3 month moving average failed to match initial forecasts and provided some optimism that inflation may retreat.

The Euro has failed to resume the upside momentum against the Pound and Euro buyers are well placed to work a stop order in the market and take advantage of this unexpected rally.

The vulnerability in Sterling sentiment has been further exposed this morning as the UK currency declined following a report from the Nationwide Building Society.

House prices in Britain and Wales fell by the most in over three years in April with the average cost of a home falling 0.6% from the previous month as rising mortgage rates deterred home buyers.

The report follows news that UK gross domestic product only expanded 0.4% in the three months through March, the least since 2005, while the International Monetary Fund expect economic growth to stall to the slowest pace since 1992.

Rising consumer prices combined with tighter lending conditions and seen a month-on-month drop in retail sales that threatens to curtail the pace of the UK economy and that may lead to a further reduction in borrowing costs.

Despite a fundamental lack of European economic data released over the past week, the Euro has also paired significant losses versus the Dollar, falling to the lowest level in more than three weeks following mildly dovish comments from ECB members and declines in two second tier inflation indicators.

The unexpected drop in the M3 money supply index was greeted by a statement from ECB governing council member, Lorenzo Bini Smaghi, who noted that inflation in the region had reached an acceptable level.

In the last ECB press conference, the chairman Jean-Claude Trichet, acknowledged that "vigorous" M3 growth makes it almost impossible for the ECB to cut interest rates.

However, a softening in money supply has the potential to change the ECB's staunchly hawkish stance and lead to an eventual cut in European borrowing costs.

After flirting with a new record low at the beginning of the week, the revival in Dollar sentiment saw the U.S currency make gains against both the Pound and the Euro despite reports that new home sales had plummeted to the lowest level since October 1991.

Nevertheless, an unexpected rise in Durable goods orders combined with a drop in jobless claims helped the Dollar to a three week high versus the Euro by the close of trading on Friday.

However, reports on Friday showed that consumer confidence in the Michigan area plunged to a 26-year low and provided a poignant reminder of the dire outlook for the U.S economy.

Data Released 28th April

No Data Released

written by Adam Solomon

The Pound has been struggling over the past few trading sessions and the UK currency fell a further 0.2% versus the Dollar yesterday as we look set to revisit the trend support around 1.9650.

Nevertheless, the Pound took advantage of broad Euro weakness to trade higher by the close last night despite reports that UK retail sales fell at the fastest pace in over a year last month.

The Office of National Statistics said that sales plunged 0.4% on the month in March and while the figures were almost in line with the median forecast, they revealed an underlying weakness in consumer spending that threatens to curtail the pace of economic growth.

Although the latest sales figures showed the biggest monthly drop in nearly a year, a separate gauge of the report showed that the yearly growth rate remained robust.

Retail sales in the first quarter of 2008 have actually increased 2.0% from this
stage last year, which represents the largest quarterly gain since mid 2006. The Bank of England have previously expressed concerns that the monthly sales report has proved far too erratic as a gauge of economic growth and more emphasis should be placed on the trend growth rate.

Elsewhere, the cautious approach from some BoE policy makers was vindicated as a separate report from the Confederation of British Industry showed that manufacturers have continued to raise prices even as activity slows.

The monthly trends survey showed that orders plummeted in March to the lowest level since October 2006 while higher prices will feed into inflation and force the Bank of England to re-evaluate their monetary outlook.

The Euro has risen nearly 10% against both the Pound and the Dollar this year but the single currency has declined for a second day in a row following reports that business confidence in Germany and France fell to the lowest level in over two years.

The Ifo sentiment index, which accounts for business confidence in Europe's largest economy, slipped to a reading of 102.4 this month. The reading represents the lowest since January 2006 while the equivalent index in France showed that confidence had plunged to a 16-month low.

The Euro fell over a cent against the Dollar and also recorded significant losses versus the Pound as the reports combined paint a fairly gloomy picture on the outlook for the Euro-zone economy as record high food and energy costs stoke inflation.

The positive momentum surrounding the Dollar ran into a second day yesterday as the U.S currency paired further gains against the majors amid speculation that the Fed has done their job in securing the future outlook for the U.S economy.

In addition, the Dollar found further support as U.S durable goods orders rose unexpectedly last month, indicating that a weak currency is fuelling exports and helping factories cope with the slowdown in growth.

Orders for goods designed to last several years rose 1.5% in March while a separate report showed that initial jobless claims actually fell to a two month low last week.

The dwindling sentiment surrounding the U.S labour market has weighed on the Dollar in recent weeks but unemployment claims plummeted to 342,000 in the week ending 25th April.

The Dollar also managed to shrug off a particularly disappointing report on the housing market as sales of new homes dropped 8.5% in March, which represents the fewest number since October 1991 and dismisses suggestions that the slump is showing signs of abating.

Data Released 25th April

U.K 09:30 Preliminary GDP (Q1)

EU 09:00 M3 (March)

- 3 month Moving Average

U.S 14:55 Michigan Sentiment (April Final)

written by Adam Solomon

The Pound has endured a torrid week against the majors, rising towards the $2.00 barrier versus the Dollar on more than one occasion before a barrage of disappointing reports brings the market back towards the support at 1.9750.

The Group of Seven nations has recently declared that Finance Ministers were against volatile fluctuations in the foreign exchange market but the Pound fell against almost of all of the major currencies before the Bank of England released the minutes from the April policy meeting.

The monetary policy committee took the decision to lower interest rates for the third time since December, cutting its main interest rate to 5.0% as the worst housing slump for nearly 20-years threatens to push the economy into a recession.

The voting pattern of the nine strong committee was expected to be unanimous but the report yesterday showed that two members actually elected to hold interest rates while David Blanchflower favoured a greater 50 basis point reduction.

It was the first three-way split in nearly two years as the Central Bank faces a difficult balancing act in the months ahead. Inflationary pressures are expected to exceed 3.0% this year while the current downside risks to growth have arisen following the deterioration in global credit conditions.

The Pound actually made some moderate gains in the aftermath of the report as the minutes signalled that at least eight of the nine policy makers favoured a gradual easing of interest rates.

One of the two members that voted to keep rates unchanged in April, Timothy Beasley, also said this week that the Bank must focus on controlling inflation after commodity prices rose to a record high.

However, the Pound failed to hold on to those gains for a second day in a row after a separate report showed that UK mortgage approvals fell to the lowest level in over ten years in March as the seizure of credit markets prompted lenders to impose tighter lending conditions.

The Euro rallied back towards the $1.6000 barrier against the Dollar yesterday and although we closed well under this level, the diverging interest rate expectations between Europe and the U.S suggest that a further move to the upside will only be a matter of time.

The single currency also remained virtually unchanged against the Pound as growth in European service industries unexpectedly accelerated in April, reinforcing the idea that the Central Bank could actually lift interest rates.

The report also reiterates that Europe's economy remains resilient to the credit crisis even as the U.S and UK teeter on the brink of a recession. A number of ECB officials including Axel Weber and Juregan Stark have suggested that the Central Bank must restrain inflation, which has accelerated to the fastest pace in nearly 16-years.

The focus today will fall on the German Ifo sentiment index and initial forecasts suggests that business confidence will remain roughly unchanged in April with exports forecast to increase 5% this year.

After falling back towards the $1.6000 level versus the Euro in early trade, the Dollar staged a mini rally against the majors amid speculation that we have reached a potential bottom.

Despite the staunchly hawkish stance of ECB officials on monetary policy, the European economic outlook has taken a turn for the worse in recent weeks while rising commodity prices have all but dismissed the prospect of a 50 basis point in U.S interest rates.

In addition, the Dollar has found support from better than expected housing numbers as existing home sales fall less than forecast in March and that will fuel speculation the housing slump is finally showing signs of abating.

The positive momentum surrounding the Dollar may continue today as we build up to the release of a separate report on new home sales for March, although purchases probably dropped a further 1.7% from the previous month.

Data Released 24th April

U.K 09:30 BoE Financial Stability Report

U.K 09:30 Retail Sales (March)

U.K 11:00 CBI Industrial Trends Survey (April)

EU 09:00 Current Account (February)

GER 09:00 Ifo Index (April)

U.S 13:30 Durable Goods Orders

U.S 13:30 Jobless Claims (w/e 25th April)

U.S 15:00 New Home Sales (March)

written by Adam Solomon

The fallout from the Bank of England's decision to swap £50 billion worth of UK government bonds for mortgage securities was greeted with cynicism from the market as the Pound plunged against both the Euro and the Dollar amid suggestions that the Central Bank is following in the Fed's footsteps.

The Bank of England and particularly the governor, Mervyn King, has endured a barrage of criticism over their handling of the credit crunch with the Bank reluctant to enter an environment where banks and lenders would start relying on emergency funding to get them out of financial difficulty.

Initially, the Pound continued to struggle yesterday, falling against 11 of the 16 most actively traded currencies amid speculation that the turmoil surrounding credit markets will rage on.

According to a former MPC policy maker, the Bank's initiative has a small chance of revitalising the depleted UK housing market as prices drop in most areas of the country.

The Pound fell a further 0.1% versus the Euro and remained virtually unchanged against the Dollar despite news that the Royal Bank of Scotland Group plc were preparing to sell £12 billion in shares in an effort to boost capital.

However, by midday the Pound had recouped those losses and began to make significant gains against the majors, rising above the resistance at 1.9896 versus the Dollar to close just under the $2.00 barrier last night.

The sharp intraday volatility surrounding the Pound can be attributed to news that the Finance Minister Alistair Darling is set to meet key mortgage lenders with hopes of convincing to cut the cost of home loans.

Euro and Dollar buyers may wish to place a stop order in the market to protect against a further downside move as the focus today will inevitably fall on the release of the minutes from the Bank of England's last policy meeting and the Pound is under pressure in the build up to the announcement.

The MPC are expected to have voted unanimously to cut interest rates in April but a split decision will obviously revive Sterling sentiment as the probability of a back to back rate cut in May will all but diminish.

The Euro surpassed the $1.6000 barrier versus the Dollar for the first time ever yesterday and further gains are likely in the near-term as ECB governing council member, Christian Noyer, reiterated concerns over consumer prices and insisted that the Central Bank must restrain inflation.

The harmonised index of European consumer prices showed that inflation had risen to 3.6% year-on-year in March while the overwhelming increase in commodity prices combined with rising wage demands will force the ECB to retain a tightening bias in the months ahead.

Despite the fundamental lack of European economic data this week, the Euro will probably consolidate above the $1.6000 level and continue to make gains against the Pound as the diverging interest rate expectations between Europe and the UK become increasingly wider.

The Dollar declined against the Euro yesterday, recording a fresh record low before retreating back towards the $2.00 level versus the Pound after existing home sales fell in March while tighter lending restrictions deterred buyers.

Sales plummeted 2.0% from the previous month, which was actually less than forecast, although the median sales price actually fell 7.7% from this time last year as rising foreclosures weighs on confidence and dims the prospects for economic growth.

The housing slump has raged on for three years now as defaults on subprime mortgage loans led to tighter borrowing conditions while falling property and rising foreclosures sends the economy hurtling towards a recession.

The downturn in consumer confidence is also hurting the economic outlook and with oil prices hitting a record high of $119 a barrel yesterday, the Fed have little choice but lower interest rates by a further 25 basis points and ignore the risks to inflation.

Data Released 23rd April

U.K 09:30 BoE MPC Minutes

EU 09:00 Flash PMI Manufacturing (April)

- Flash PMI Services

EU 10:00 Industrial Orders (February)

written by Adam Solomon

Following on from last week, the Pound succumbed to speculation that the Bank of England will reduce interest rates by a further 25 basis points in May following a 2.5% drop in house prices and news that retail sales had contracted for the first time in three years.

Nevertheless, a surprisingly positive report from the Bank of England catapulted the Pound towards the $2.00 level on Friday and further gains were anticipated amid speculation that the BoE and the Treasury will announce new asset swap proposals this week.

The initiative is designed to provide some relief to financial institutions and encourage lenders to reduce mortgage rates while preventing the housing market from curtailing the pace of economic growth.

However, the Pound has relinquished almost all of the gains against the Dollar this morning following the Bank of England's announcement that it will swap £50 billion of government bonds in favour of mortgage backed securities.

The market's unexpected interpretation of the initiative suggests that the extent of the credit crisis is yet to be realised as the Bank of England attempt to a spark a revival in lending.

The Pound has fallen back towards the support at 1.9896 against the Dollar after breaching the $2.00 barrier for the first time in two weeks and the UK currency may struggle to recapture those gains this morning as UK house price fell a further 0.1% in March.

The Euro has consistently made gains this year as a combination of strong economic growth and tighter monetary policy propelled the single currency to post record highs against both the Pound and the Dollar but there are some signs that the economy is no longer immune to the credit squeeze.

The Euro fell by the most in three weeks versus the Pound and also retreated from the 1.6000 level versus the Dollar as ECB governing council member, Jean-Claude Juncker, described the Euro's meteoric rise as "undesirable".

However, the contrasting comments from Bundesbank Bank president Axel Weber seems to suggest that there a division brewing within the ECB as he reminded the market that the ever present inflation concerns make it impossible for the Central Bank to cut interest rates.

Data Released 21st April

UK 00:01 Rightmove House Prices

written by Adam Solomon

The Pound has plunged to a record low against the Euro on three separate occasions this week while also recording significant losses versus the Dollar amid speculation of a back-to-back interest rate cut in May as economic growth stalls and the credit crisis deepens.

Nevertheless, the UK currency bounced back above the 1.2400 level yesterday and also recorded gains against most of the 16 most actively traded currencies despite news that the gap between the BoE's benchmark rate and the cost of borrowing rose to the highest level since December.

The Bank of England offered £13.7 billion in liquidity in the monthly auction yesterday while tighter credit conditions means that the shortage in funds is forcing the Prime Minister, Gordon Brown, to find new ways of preventing a recession.

Brown said yesterday that the government was looking for new initiatives to inject liquidity into the mortgage market and is studying measures already taken in the U.S.

In the aftermath of the report, the Pound rallied from a two week low versus the Dollar as speculation builds that the BoE will announce a plan to help financial institutions as the credit crisis plunges the economy towards recession.

The price action surrounding Cable yesterday seems to suggest that a close above 1.9896 would signal a move to the upside but Dollar buyers may wish to place a stop in the market to protect against an adverse move.

The Euro rallied to yet another record high against the Dollar yesterday and a move above the 1.6000 barrier looks imminent as the diverging interest rate expectations between Europe and the U.S becomes increasingly apparent.

The Federal Reserve are expected to lower interest rates by a further 25 basis points this month while the overwhelming rise in consumer prices means that the ECB are unlikely to reduce rates until the third quarter.

Governing council member, Alex Weber, joined the chorus of calls for tighter monetary policy when he said that the Central Bank must assess whether interest rates are high enough to contain inflation.

The annual pace of inflation rose to 3.6% in March, well above the ECB's 2.0% target and policy makers seem prepared to sacrifice economic growth and maintain price stability.

However, the President of the Central Bank, Jean-Claude Trichet, has expressed growing concerns over the current level of the Euro but Weber said yesterday that there are "some positive signs that the worst may be behind us".

The persistent inflationary pressures and the ECB's hawkish stance on monetary policy has seen the futures market all but price out the possibility of an interest rate cut this year.

However, the intraday movement yesterday saw the Euro relinquish the day's previous gains against the Pound but the diverging interest rate expectations between Europe and the UK means that a shift in trend is unlikely in the near-term.

Therefore, Euro buyers may wish to take advantage of the recent move or at least place a stop order in the market to protect against a further move to the downside.

Despite making widespread gains against most of the major currencies yesterday, the Dollar plunged almost 300 pips against the Pound and the market looks poised for a move above the $2.00 level following a close above 1.9896 last night.

The move came in the aftermath of news that the Bank of England would provide emergency funding to struggling financial institutions while the Dollar was susceptible to a mixed bag of U.S economic data.

Contrary to the tone of the Empire State index earlier this week, manufacturing in the Philadelphia region contracted by the most since 2001. Elsewhere, the weekly jobless report showed that the number of Americans receiving unemployment benefits rose to the highest level in four years, further emphasising the dramatic slowdown in the labour market.

The housing slump has raged on for three years and is eroding consumer confidence while spurring job cuts. The surprising drop in production overshadowed the first increase in the Conference Board's leading economic indicators.

Data Released 18th April

U.K 09:30 PSNCR (March)

written by Adam Solomon

The Pound's dramatic and unrelenting decline against the Euro continued yesterday as the UK currency sank to yet another record low, breaching the 1.2400 level for the first time since the Euro's inception in 1999.

A combination of bleak economic reports in the UK and faster inflation in the Euro-zone contributed to the move as UK unemployment fell by less than forecast in March.

Jobless claims benefits declined 1,200 from the previous month, the first increase in 17 months while average hourly earnings increased beyond initial expectations.

Although the somewhat surprising increase in wages suggests that inflation may accelerate over the coming months, the overall tone of the report adds to evidence that the labour market is beginning to soften.

The global credit crunch is weighing heavily on investor and business confidence and has already ended the decade long housing boom with prices falling 2.5% in March.

The unemployment rate is still at the lowest level since June 1975 but Bank of England policy maker, David Blanchflower, who has consistently favoured a more aggressive phase of monetary easing, expects "some weakening" in employment.

The Chancellor Alistair Darling is banking on a strong labour market to support spending and steer the economy away from the first recession since 1991. However, the RICS house price balance showed that sentiment in the property market has fallen to the lowest level since records began in 1978 and slower growth may encourage the BoE to ignore wage inflation and continue cutting rates.

It seems only a matter of time before the Euro breaks the 1.6000 barrier versus the U.S Dollar and the single currency also rose to a fresh record high against the Pound amid reports that European inflation accelerated beyond initial estimates in March.

The harmonised index of consumer prices showed that the inflation rate rose to 3.6% in March and to the highest level in almost 16-years, which reinforces the ECB's staunchly hawkish stance on monetary policy.

Rising food and energy costs are stoking inflation as the price of oil rose to $115 per barrel yesterday while ECB board member, Juergen Stark, said that Euro-zone interest rates may not be high enough to contain inflation.

The report indicates that the Central Bank simply does not have the room to begin cutting rates even as economic growth cools and the Euro subsequently made rose to a record high versus both the Pound and the Dollar.

The Dollar has dropped over 13% in value on a trade-weighted basis in the past year as the Fed aggressively lowered interest rates to shore up economic growth following the fallout from the collapse of the U.S subprime mortgage market.

The U.S currency plunged to a record low versus the Euro yesterday and relinquished much of the previous day's gains against the Pound as further evidence was released to suggest that the U.S housing recession deepened in March.

Housing starts shrank to the fewest number since 1991 while a separate report showed that manufacturing stabilised with production up 0.3% from February. The number of U.S foreclosures has increased dramatically, which is weighing on property values and undermining construction but a weak Dollar is helping exports and boosting output.

Data Released 17th April

EU 09:00 ECB Monthly Bulletin

U.S 13:30 Initial Jobless Claims (w/e 12th April)

U.S 15:00 Leading Indicators (March)

U.S 15:00 Philly Fed Index (April)

written by Adam Solomon

The Pound fell to a fresh record low against the Euro yesterday and also paired fresh losses versus the majority of the 16 most actively traded currencies following reports that consumer prices rose at a slower pace than forecast in March and the slump in housing deteriorated to the worst level since 1978.

The UK currency plunged through the major support at 1.9650 and to the lowest level in six weeks against the Dollar as news broke that the UK inflation rate remained unchanged at 2.5% last month.

The result matched the previous reading in February but fell short of initial expectations, giving the Bank of England scope to cut interest rates beyond the current 5.00%.

The Pound subsequently declined to a record low against the Euro, breaching the 1.2400 barrier amid speculation that the monetary policy committee will implement a back-to-back rate cut in May.

The annual pace of inflation has exceeded the Bank's 2.0% target for the past six months in a row but consumer price expectations seem to be moderating despite the unexpected increase in UK factory prices over the same period.

Higher food and energy costs prompted the governor of the Bank of England to forecast inflation rising above 3.0% this year but UK employees have struggled to win bigger pay increases and average earnings probably rose at the weakest pace in seven months.

The underlying weakness in Sterling sentiment is likely to dominate the market over the coming weeks as the overwhelming drop in the RICS house price balance provokes speculation that UK interest rates will fall towards 4.00% this year.

The resilience of the European economy has been called into question recently and analysts are becoming increasingly pessimistic on the outlook for growth as the report from the ZEW centre of economic research illustrated.

Investor confidence in Europe's largest economy unexpectedly fell in April amid concerns that faster inflation, a strong Euro and the fallout from the credit crisis weighs on growth.

The ZEW index declined to reading of minus 40.7 from March, which coincides with the mixed tone of economic data in recent weeks as the gauge of analyst expectations approaches the lowest level in 15-years.

Although the Euro increased to a record high against the Pound yesterday, the single currency fell by almost a cent versus the Dollar as the ECB chairman, Jean-Claude Trichet, made a statement in New York, saying that the Central Bank will have less leeway to decide on interest rates.

His comments come in the aftermath of the G-7 summit in Washington at the weekend and reflect the members concerns on the recent instability surrounding the market.

The Dollar staged a modest recovery against the majors yesterday, removing on the heels of stronger economic data as the Empire State manufacturing index unexpectedly surged high in March while foreign purchases of U.S securities increased by more than anticipated in February.

The Dollar has declined a record low against the Euro in recent weeks and the modest rebound in manufacturing suggests that U.S exports are finally becoming more attractive.

Elsewhere, a separate report illustrated the persistent inflationary concerns that may prompt the Federal Reserve to implement a smaller 25 basis point reduction in April.

U.S producer prices increased almost twice as much as initial forecasts in March as higher fuel and food costs threaten to entrench the economy. The 1.1% gain from the previous month coincides with the rising cost of raw materials and the focus today will inevitably fall on the CPI report, which may show that a broader measure of inflation also accelerated in March.

Data Released 16th April

UK 09:30 Claimant Count (March)

- Unemployment Rate

UK 09:30 Average Earnings (February)

EU 10:00 Harmonised Consumer Price Index (March - Final)

U.S 13:30 Housing Permits (March)

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

U.S 14:00 Industrial Production (March)

- Capacity Utilisation

U.S 20:00 Fed's Beige Book (April)

written by Adam Solomon

The Pound made some unlikely gains against the Euro yesterday and also enjoyed a large intraday move versus the Dollar after an industry report showed that UK producer prices rose at the fastest annual pace since 1991.

UK factory gate inflation climbed 6.2% from this stage in 2007, compared with 5.9% in February and the report only serves to emphasise the overwhelming increase in the cost of raw materials and adds to concerns that faster inflation will become entrenched in the economy.

Food and energy costs have risen to a fresh record high this year and the report yesterday suggests that factories will put pressure on consumer prices and that will be of particular concern to policy makers.

The Bank of England lowered the benchmark lending rate to 5.00% last week in an attempt to shelter the economy from its worst year of economic growth in 16-years.

Just last month, the governor of the BoE, Mervyn King, said that inflation is likely to exceed the government's 2.0% target in the coming months while the report yesterday may yet have a bearing on monetary policy and may even dictate the timing of the next reduction.

The Pound rebounded from the lowest level on record versus the Euro and snapped a two day losing streak against the Dollar as the focus switches to the CPI report this morning.

The Euro endured a day of mixed fortunes yesterday as the impact of the G-7 summit had an unexpected influence on the market, which saw the single currency relinquish some of its gains against the Pound.

The Euro also opened lower versus the Dollar yesterday as the statement that followed the meeting showed that G-7 members were concerned with volatile currency fluctuations and see the overwhelming strength of the Euro as a threat to the global economy.

The Euro has risen 9% in value against the Pound in the last four months alone and the only realistic prospect of redressing the balance would be for the ECB to be persuaded into a series of rate cuts.

The Central Bank has remained staunchly hawkish throughout the credit market turmoil while the Federal Reserve and the BoE beginning a period of easing.

The sharp contrast in policy can be attributed to the Euro's momentous appreciation and the upward swing in inflation while further gains are likely in the short-term amid specualtion that the ECB will refrain from cutting interest rates until the end of the year.

The dwindling sentiment surrounding the U.S economy has prompted the Federal Reserve to begin an aggressive period of monetary easing and the decisive drop in U.S consumer confidence will probably lead to a further quarter-point reduction this month.

The Dollar failed to rally yesterday despite a surprisingly positive report from the Commerce Department, which showed that retail sales rose in March, reflecting the dramatic increase in fuel prices.

Sales jumped 0.2% last month but the overall sentiment suggests that spending, which accounts for two thirds of the economy, is waning and will continue to stagnate as property values tumble and the jobless rate creeps higher.

Nevertheless, the Dollar may continue to decline as the focus switches to the latest round of inflationary data but even a sharp rise in factory prices won't prevent another rate cut this month.

Data Released 15th April

UK 09:30 Consumer Price Index (March)

- RPI

UK 09:30 DCLG House Price Index (February)

GER 10:00 ZEW Expectations Balance (April)

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

U.S 13:30 Empire State Index (April)

U.S 14:00 Net Capitla Inflows - TICS (February)

U.S 18:00 NAHB Housing Market Index (April)

written by Adam Solomon

Following on from last week, the Pound recorded another weekly loss against both the Euro and the Dollar amid speculation that the Bank of England will continue cutting interest rates as economic growth stalls.

The UK currency plummeted to fresh record lows for three consecutive days against the Euro as reports showed a 2.5% drop in house prices while consumer confidence slipped to the lowest level in nearly four years.

The Bank of England's monetary policy committee elected to lower interest rates for the third time since December. The tone of the accompanying statement suggests that policy makers may be forced to lower rates consecutively in May, eroding the allure of Sterling denominated assets.

The Bank also highlighted that credit conditions are tightening and further monetary easing may be necessary in order to provide some relief to the financial sector and force lenders to lower rates.

The governor of the Bank of England, who also mentioned the persistent inflationary concerns that threaten the pace of growth, has faced a barrage of criticism over his handling of the credit crisis.

According to the head of the Council of Mortgage Lenders, the BoE should be prepared to be more flexible in their handling of the credit crisis and urged Mervyn King to keep his word and show leadership in times of turmoil.

The positive sentiment surrounding the Euro continued last week as the single currency rose to within a cent of a fresh record high versus the Dollar following the ECB's decision to keep interest rates unchanged while other Central Banks begin a period of easing.

In addition, the tone and language used in the accompanying press conference suggests that policy makers are still more concerned with the threat of inflation despite a host of reports that indicate an impending slowdown in growth.

That sentiment was reflected in a statement on Friday from ECB governing council member Axel Weber who said that the Bank doesn't have the scope to cut interest rates with inflation running at the fastest pace in nearly 16-years.

Consumer prices have remained above 3.0% this year but the International Monetary Fund said last week that inflation in the Euro-zone will slow to 1.9% in 2009 and therefore the Central Bank will resist calls for a rate cut until at least the third quarter.

Due to a distinct lack of economic data, the Dollar was largely susceptible to news in Europe and the UK as the Bank of England elected to lower interest rates and the Group of Seven nation met in Washington.

The Dollar rose to a one week high against the Euro and also made further gains against the Pound after the G-7 changed its statement on currencies for the first time in four years and said that sharp fluctuations in the market may hurt the global economy.

The shift in the tone of the statement suggests the G-7 are prepared to intervene accordingly and prevent sharp volatility in the foreign exchange market after the Dollar dropped 12% in value over the past year alone.

The Dollar rallied in the aftermath of the statement but the dwindling sentiment surrounding the U.S economy was emphasised in a regional survey on consumer confidence.

The preliminary index of the Michigan sentiment showed that confidence sank to the lowest level in 26-years this month as fuel prices continue to rise and the labour market deteriorates.

Data Released 14th April

U.S 09:30 Producer Price Index (March)

- Output

EU 10:00 Industrial Production (February)

U.S 13:30 Retail Slaes (March)

U.S 15:00 Business Inventories (February)

written by Adam Solomon

The Pound made some unlikely gains against the Euro yesterday, rebounding from a record low versus the single currency after the Bank of England warned that inflation will rise further this year, as the MPC cut interest rates by a quarter of a percentage point.

The Pound rose for the first time in a week against the Euro and also climbed from a six week low versus the Dollar despite the futures market pricing in further monetary easing to come as the BoE attempt to balance a slowing economy against rising inflationary pressures.

The Pound briefly broke back above the 1.2500 level versus the Euro yesterday before resuming the downward momentum this morning and further losses are likely in the near-to-medium term amid speculation of a back-to-back rate cut in May.

In the accompanying statement, the Bank's monetary policy committee highlighted that downturn in housing threatens curtail the pace of UK economic growth.

However, policy makers also acknowledged that inflation will continue to accelerate this year in accordance with the rapid rise in food and energy costs.

The Pound has fallen 9% in value against the Euro this year alone amid the diverging interest expectations between Europe and the UK with the ECB expected to keep rates unchanged until the third quarter.

The recent price action surrounding the Euro suggests that the market was anticipating a hawkish rhetoric from the ECB yesterday after the Central Bank elected to leave interest rates unchanged at 4.00% despite the apparent threats to economic growth.

The Euro has risen to a record high for three consecutive days versus the Pound while recent economic reports suggests that the Europe is no longer immune to a U.S led economic slowdown.

Nevertheless, the tone of the accompanying press conference reflected the ECB's staunchly hawkish stance on inflation as the chairman, Jean-Claude Trichet, mentioned 'price stability' no fewer than seven times.

Trichet did mention his concerns over the current level of the Euro but with inflation stuck above the 3.0% barrier, the chances of an interest rate cut before September seems increasingly unlikely.

Due to the fundamental lack of U.S economic data released this week, the Dollar has been largely susceptible to news from overseas but the U.S currency may come under some pressure in the build up to G7 meeting.

The Group of Seven nations are unlikely to agree on a plan to support the Dollar while an industry report may show that U.S consumer confidence fell to the lowest level in 16-years.

The Dollar has weakened to within a cent of the all time record low versus the Euro and further losses are likely over the coming weekend as speculation builds that the U.S economy is in the midst of a recession.

However, a weaker Dollar has made U.S exports far more competitive in global markets and the Fed hope that trade can support growth this year in the wake of the worst slump for over twenty years.

Data Released 11th April

U.S 13:30 Import prices

- Export Prices

U.S 14:55 Michigan Sentiment (April Prelim)

written by Adam Solomon

The unrelenting decline in Sterling sentiment saw the UK currency plunge to a fresh record low against the Euro yesterday and breach the 1.2500 barrier for the first time as the market anticipates a quarter-point cut in UK interest rates.

The Pound has struggled to make gains against most of the 16 most actively traded currencies this week as a host of negative economic reports suggests that the economy is headed precariously for a recession.

According to a report from the Nationwide Building Society, UK consumer confidence fell to the lowest level in nearly four years last month amid falling home values and rising mortgage rates.

House prices fell 2.5% last month, the most since 1992, as the seizure in credit markets prompted some lenders to withdraw mortgage offers to new customers.

Nevertheless, the UK economy is showing some signs of resilience as a separate report from the Confederation of British Industry showed that manufacturing had unexpectedly increased for a second consecutive month in February.

The Pound's weakness against the Euro is seemingly helping raise demand for UK exports and that sentiment may be reflected in the trade balance data this morning where the deficit in goods and services expected to narrow in February.

The focus today will inevitably fall on the Bank of England interest rate decision this lunchtime where Euro and Dollar buyers may want to think about placing a stop order in the market to protect against any further Sterling losses.

The monetary policy committee will probably cut the benchmark interest rates by a quarter point to 5.00% as the worst housing slump since 1992 causes concerns that the economy is slipping towards a recession.

The resilience of the European economy combined with the ECB's staunchly hawkish stance on inflation has taken the Euro to within half a cent of its all time record high against the Dollar while also breaking the 1.2500 barrier versus the Pound.

The latest price action surrounding the Euro suggests that the market expects the Central Bank to hold interest rates steady today while the focus will switch to the tone and language used in the accompanying press conference.

The Central Bank President, Jean-Claude Trichet, is also expected to remain hawkish on protecting the economy from rising inflationary pressures while expressing no concern about the current level of the Euro and the subsequent impact on the economy.

Despite the obvious dip in retail sales, the improvement in the recent trade data is particularly encouraging to policy makers because it confirms that the strength of the Euro is only having a limited impact on exports.

The ECB have been focusing on the threat of inflation rather than the inevitable slowdown in growth and in the last monetary policy meeting, Trichet emphasised the risks to price stability no fewer than eight times.

The governing council have struggled to anchor inflation this year with consumer prices remaining above 3.0% for the past three months and the Euro may continue to gain momentum amid speculation that rate will remain unchanged until September.

The Dollar plummeted to within 50 pips of its record low versus the Euro while the U.S currency also struggled to make gains against the Pound amid a fundamental lack of economic data.

The tentative price action surrounding the Dollar in recent days indicates that the move yesterday represents the dovish sentiment of the Federal Reserve who are expected to lower interest rates again this month.

The Dollar has been largely susceptible to news from overseas as the focus this week falls on the ECB and BoE rate announcements this lunchtime. The minutes from the last FOMC rate decision indicates that the Fed are divided while policy makers are equally concerned with the threats to economic growth and inflation.

In terms of economic data, the Dollar may find some support this afternoon as the U.S trade balance is expected to show that the deficit in goods and services probably narrowed in February as a weak Dollar helped propel exports.

Data Released 10th April

U.K 09:30 Global Trade Balance (February)

- Ex EU Trade

U.K 12:00 Bank of England Rate Announcement

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Trade Balance (February)

U.S 13:30 Initial Jobless Claims (w/e 5th April)

U.S 19:00 Federal Treasury Budget (March)

U.S 15:00 Wholesale Inventories (February)

written by Adam Solomon

The dovish sentiment surrounding the Bank of England interest rate decision has driven the Pound to the lowest level on record against the Euro after a host of negative economic reports boost speculation of a rate cut.

The UK currency also plunged to a six week low versus the Dollar amid reports that house prices dropped by the most since 1992 last month as the seizure in credit markets forced lenders to terminate mortgage offers and raise rates.

According to the report from HBOS Plc, the average cost of a home in Britain lost 2.5% in value between February and March and the Pound subsequently plunged against the majors amid speculation that the monetary policy committee will slash interest rates for the third time since December.

The decade long housing boom that has fuelled 62 consecutive quarters of economic growth and helped propel the Labour Party to three election victories appears to be coming to a rapid end.

The sustained drop in house prices coincides with reports that the UK's biggest mortgage lenders are withdrawing offers to new clients as the ongoing credit crunch continues to weigh on confidence.

By the close of trading last night, the Pound had fallen towards 1.2500 against the Euro as the Prime Minister Gordon Brown made some rather contentious comments to the BBC yesterday.

In a brief statement, Brown said that there is room for the Bank of England to cut interest rates because inflation is low despite the fact that consumer prices have remained above the Bank's 2.0% target are forecast to breach the 3.0% barrier this year.

The unrelenting appreciation of the Euro saw the single currency record a fresh record high against the Pound yesterday while remaining virtually unchanged versus the Dollar as we build up to the ECB interest rate announcement on Thursday.

The lack of price action is fitting considering the expectations surrounding the accompanying press conference where the chairman, Jean-Claude Trichet, may finally acknowledge that Europe is suscepitible to a U.S led economic slowdown.

The Euro-zone economy has enjoyed the best period of growth in seven years but has been largely reliant on exports to support the economy and the recent strength of the Euro will obviously hamper demand.

That sentiment was reflected in a report in Germany this morning as exports where unchanged in February as the Euro rose to within a cent of the $1.6000 barrier versus the Dollar, making exports far less competitive.

The Dollar found some support yesterday as the renewed appetite for riskier assets saw the U.S currency close higher against the majors despite speculation that the economy is in the grip of a recession.

That sentiment was reflected in the surprisingly eventful minutes from the last FOMC meeting where policy makers cut interest rates by 75 basis points. Few analysts were expecting any substantial changes from the February report but considering the disappointing tone of recent economic reports, the Fed's outlook for growth has "weakened considerably".

Concerns are growing with the Open Market Committee that the dramatic downturn in economic growth will be "prolonged and severe".

However, the bearish sentiment of the report was limited as the two dissenters in last month's cut voted for a less aggressive move, arguing that the previous 225 basis points of cumulative easing haven't yet fed through to the economy.

Data Released 9th April

U.K 09:30 Industrial Production (February)

- Manufacturing Output

EU 10:00 Final GDP (Q4)

U.S 15:00 Wholesale Inventories (February)

written by Adam Solomon

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

Following on from last week, the increased sense of stability that has returned to financial markets has helped Dollar sentiment in recent weeks as traders appetite for risk aversion subsided and U.S stocks rallied.

Nevertheless, a barrage of weak economic data suggests that the U.S economy is in the grip of a recession and the third consecutive monthly drop in U.S jobs only serves to increase speculation of further interest rate cuts to come.

Non-farm payrolls shrank by 80,000, which was significantly more than forecast, while the unemployment rate rose to the highest level since September 2005.

The damaging report from the Labour Department indicates that job losses will shake consumer confidence and contribute to a downturn in spending that threatens to curtail the pace of economic growth.

The report also follows a recent statement from the chairman of the Federal Reserve, Ben Bernanke, who acknowledged that the economy may face a recession and will need to do more, in terms of slashing interest rates, to prevent further deterioration.

Despite the third contraction in job growth in just three months, the Dollar stood relatively firm against the majors, closing well under the $2.00 barrier against the Pound on Friday.

The Dollar's position will surely be tested today as the focus switches to the FOMC minutes of the March meeting where policy makers cut the benchmark lending rate by 75 basis points to 2.25%.

The recent price action surrounding the Euro and the deteriorating outlook for the Euro-zone economy has hampered the single currency over the past week as speculation builds that a U.S led ecomomic slowdown is spreading to Europe.

The Euro has risen to fresh record highs against both the Pound and the Dollar in the last month but a monumental shift in commentary from the ECB President this Thursday would be very bearish for Euro sentiment.

The recent downturn in growth and the mixed tone of economic reports has severly underminded the ECB's staunchly hawkish stance on inflation and provoked some officials to publicly express their concerns over an inpending slowdown in growth.

Therefore, the focus this week will be firmly fixed on the ECB interest rate announcement on Thursday and although the governing council will refrain from cutting rates this month, the market will be looking for a shift in tone in the accompanying statement.

The Pound has struggled to consolidate on the recent gains made against the majors as the maket continues to factor in a 25 basis point cut in UK interest rates this Thursday.

The deteriorating outlook for the UK economy combined with the escalating crisis in credit means that policy makers must intervene and provide some relief to the consumer while bringing some stability back to the market.

Two members out of the nine strong committee actually voted for a cut in March and the minutes from the MPC meeting showed that the Bank was very concerned with the perception of a back-to-back rate cut.

Therefore, a quarter of a percentage point cut is a close call but the most likely outcome of the two day meeting as the growing reluctance of mortgage lenders to extend new loans may force the BoE into taking further action.

Data Released 7th April

GER 11:00 Industrial Production (February)

U.S 20:00 Consumer Credit (February)

written by Adam Solomon

The speculation surrounding an April interest rate cut has hampered Sterling sentiment this week and the UK currency may struggle to make gains in the build up to the April 10th meeting as the ongoing credit crisis threatens to send the economy into recession.

The Bank of England have lowered interest rates on two occasions since August but tightening credit conditions means that lenders are reluctant to lower mortgage rates while a number of major financial institutions may follow the path of the troubled lender Northern Rock plc.

The Bank of England have released $10 billion at any one time in emergency funding but the divisions in lending are expected to escalate. First Direct, which is a branch of HSBC, announced yesterday that they would be withdrawing all of their mortgages to homeowners who were not existing customers and Halifax, the UK's biggest lender, is rumored to be following suit within the next week.

This initiative has the potential to curtail growth in the UK housing market as lenders hike interest rates on loans and remove their mortgage lending products completely.

That sentiment was reflected in a report from the Bank of England yesterday where UK mortgage approvals slumped towards the lowest level in nine years in February as banks freeze applications and curb lending.

The Pound struggled to recover any of the losses versus the Dollar but remained virtually unchanged against the Euro amid a mixed bag of UK economic reports.

The Purchasing Managers' index for construction contracted for the first time in six years while consumer credit advanced to the highest level in five years.

The heightened sense of volatility surrounding the market seemed to gather momentum yesterday as the Euro declined against the Dollar in early trade following speculation that the U.S led recession will spread to Europe and lead to a reduction in European interest rates.

The ECB have been almost obsessed with containing inflation as the annual pace of consumer prices remains above the 3.0% barrier but there are signs that the economy is feeling the pressure from the credit crunch and a strong currency.

An EU report this morning may show that Euro-zone retail sales grew at half the previous month's pace in February while the focus will surely fix on Jean-Claude Trichet's speech in Berlin.

The chairman of the European Central Bank may recognize the downside risks to economic growth as a number of governing council members indicate that inflation will slow by the end of the year.

By the close of trading last night, the Dollar had resumed its downward momentum against the Euro and also recorded modest losses versus the Pound after the Fed chairman, Ben Bernanke, acknowledged for the first time that the U.S economy is headed towards a recession.

In a testimony to the Congress's Joint Economic Committee, Bernanke said that U.S gross domestic product will not advance too much, if at all, this year and may even contract.

Bernanke's first public comments since the Fed lowered interest rates by 75 basis points in March also focused on the Bank's emergency loan to Bear Stearns Cos after the troubled firm warned that it would have to file for bankruptcy the following day.

Although the Fed have implemented a number of rate cuts in order to provide some relief to the market, the tone and language used in Bernanke's statement yesterday suggests there could be more to come with the Fed Fund Futures market already pricing in a 90% chance of a 25 basis point reduction this month.

In terms of economic data, the Dollar found little support as the strong rebound in the ADP employment index provides some indication that non-farm payrolls with exceed expectations on Friday.

Data Released 3rd April

UK 09:30 CIPS Services PMI (March)

UK 09:30 BoE Credit Conditions Survey

EU 09:00 RBS Services PMI (March - Final)

EU 09:00 Retail Sales (February)

U.S 13:30 Weekly Jobless Claims (w/e 29th March)

U.S 15:00 ISM Services (March)

written by Adam Solomon

The negative sentiment surrounding the UK economy and the heightened sense of expectation in the build up to the MPC rate announcement saw the Pound extend its losses versus the Dollar yesterday.

The fundamental lack of economic indicators released this week saw the Pound plummet to a fresh record low against the Euro but the UK currency recovered some of those gains yesterday as a surprisingly positive report on manufacturing dimmed the prospect of a 50 basis point cut next week.

Factory output accelerated well beyond initial expectations in March as the Pound's weakness against the Euro made UK exports far more attractive and offest a slowdown in U.S demand.

A separate gauge of the report showed that producer prices rose to the highest level in nine years, indicating that manufacturers are passing on higher costs to the consumer and feeding through to inflation.

Consumer prices remain well above the Bank of England's 2.0% target and the MPC may be more cautious than the market anticipates with an April rate cut still not a done deal.

Nevertheless, the deteriorating outlook for the UK economy was further emphasised in a report from Hometrack Ltd yesterday, who reported that UK house prices fell for a six straight month in March.

The average cost of a home in Britain declined 0.2% last month as banks imposed tighter lending restrictions and consumers lost confidence following the Northern Rock debacle.

The Euro's dramatic appreciation in value has caused concern among ECB policy makers but the single currency declined significantly against a resurgent Dollar yesterday as German retail sales came in much weaker than expected.

Consumer spending in Europe's largest economy fell by the most in over a year as rising food and energy costs undermine confidence.
Nevertheless, a separate reprt from the Federal Labor Agency showed that unemployment in the region fell to the lowest level since August 1992 with the jobless rate falling to 7.8% this month.

The upward swing in the German laour market is likely to support economic growth this year as a strong Euro weighs on exports and the ongoing financial crisis spreads to Europe.

The Euro has drawn support from a host of hawkish commentary from a number of ECB officials in recent months but governing council member Christian Noyer indicated yesterday that there may be room to lower interest rates if policy makers contain inflation.

The dramtic decline in Dollar sentiment has seen the Dollar plummet against most of the 16 most actively traded currencies but yesterday
the U.S currency found some support, rising by the most in 2 weeks versus the Euro.

The U.S currency also rose for a second day against the Pound as news broke that UBS AG will raise in the region of $15 billion, signalling that the world's biggest financial institutions will whether the strom in credit markets.

The U.S Dollar has completed its worst quarterly performance in four years against the Euro as the Federal Reserve proceeded to cut interest rates by 2.0% since the turn of the year in a vain attempt to revive economic growth.

In terms of economic data, the Dollar also found support as the ISM manufacturing index showed that output contracted less than expected this month.

The report from the Commerce Department eased concerns that slowing consumer spending and business investment will cause a deeper economic slmup.

Data Released 2nd April

UK 09:30 Consumer Credit (February)

- Mortgage Applications

- Mortgage Lending

EU 10:00 Producer Price Index (February)

U.S 14:15 ADP Employment Report (March)

U.S 15:00 Factory Goods Orders (February)