The Pound rises to the highest level in over a month versus the Euro despite Nationwide house prices falling to the lowest level on record
The Pound rallied to the highest level in over a month versus the Euro yesterday, closing well above the 1.2700 level last night as the declining sentiment surrounding the European economy offsets the dramatic fall in the Nationwide house price index.
UK home values fell by the most since records began in 1991 as tighter credit conditions forced lenders to withdraw some of their best offers and starved the property market of buyers. The average cost of a home in Britain dropped 2.5% from April, the biggest monthly decline in 17-years, while prices fell 4.4% from this stage in 2007.
However, the Bank of England can’t afford to reduce interest rates at the present time despite warnings from the Governor, Mervyn King, that home values will fall further over the coming months and increase the risk that the economy will stall.
The Pound fell 0.3% against the Dollar yesterday, briefly trading under 1.9700 in early trade as the house price index coincided with a recent statement from the British Bankers’ Association, who said that mortgage approvals plunged 39% from this stage in 2007.
In addition, the Pound may come under further pressure this morning as the recent drop in retail sales may be reflected in the Gfk consumer confidence survey.
The negative tone of recent economic reports outside of Germany has weighed on Euro sentiment this week as French consumer confidence fell to a record low and offset the surprising resilience in the German labour market.
Inflation in Europe’s largest economy also increased faster than expected in April with consumer prices rocketing above 3.0% following the record increase in commodity prices. Nevertheless, an index of European retail sales showed that growth in the sector increased for the first time in three months in May after plunging to a record low the previous month.
The gauge of sales growth rose to 53.1, the biggest month-on-month increase in a year, while the survey vindicates the ECB’s refusal to lower interest rates and focus on the upside risks to inflation.
However, the Euro continued to decline against the Pound yesterday and also recorded modest losses versus the Dollar as the overall tone of recent economic data indicates that cracks are appearing in the Euro-zone economy.
The Dollar rallied against most of the 16 most actively traded currencies yesterday as U.S stocks gained, oil prices retreated and speculation increased that the Federal Reserve will raise interest rates by the end of the year.
The U.S currency rose to the highest level in three weeks against the Euro after the Commerce Department reported a 0.9% increase in the annual pace of economic growth.
The revised estimate of first quarter gross domestic product grew more than initial forecasts as a weak Dollar helped U.S exports climb to a record level but the number of Americans filing for jobless benefits rose to a four year high.
Nevertheless, the Dollar found some support after Federal Reserve Bank of Dallas President, Richard Fisher, said that the governing council would need to raise interest rates from the current 2.0% if consumer prices continue to accelerate at the current pace.
Data Released 30th May
U.K 10:30 Gfk Consumer Confidence (May)
EU 10:00 EC Business Climate (May)
EU 10:00 EC Economic Sentiment (May)
- Consumer / Industrial / Services
EU 10:00 Harmonised Consumer Price Index (Flash May)
The Pound rises above 1.2600 versus the Euro as French consumer confidence drops to the lowest level on record
The uncertainty surrounding the outlook of the UK economy has weighed on Sterling sentiment in recent weeks but the Pound rose back above the 1.9800 level against the Dollar yesterday while closing well above the resistance at 1.2600 versus the Euro.
The fundamental lack of UK economic data meant that the focus switched to the declining sentiment in Europe while the modest rebound in oil prices yesterday means that the Dollar struggled to consolidate on Tuesday’s upside move.
Euro and Dollar buyers would be well placed to work a stop order in the market as the latest housing numbers indicate that the slowdown in the sector is gathering in momentum. The Nationwide house price index will follow an earlier report from the British Banker’s Association, which showed that falling home values will hamper the UK economy and weigh on consumer spending.
That sentiment may also be reflected in a report from the Confederation of British industry tomorrow with the Distributive trades balance expected to emphasise the recent dip in retail sales.
The Euro finally broke out of its tight trading range against the Pound yesterday as a spate of weak economic data undermines the ECB’s staunchly hawkish stance on inflation while policy makers seem determined to keep rates at the highest level in six years.
Business confidence in Germany and France has dropped to the lowest level in at least a decade while consumer sentiment in Europe’s second largest economy unexpectedly dropped to a record low in May.
Fuel and food prices have soared higher this year, which prompted fishermen to widen their week-long blockade of ports to the English channel this week, and reports from Morgan Stanley predict that oil will increase to $150 a barrel over the coming months.
However, the ECB are unlikely to change their stance on policy as a separate report in Germany showed that consumer price inflation rose 3.0% from this stage in 2007, compared to just 2.6% in April.
Despite the modest increase in oil prices, the Dollar rallied against the Euro yesterday following reports that U.S durable goods orders unexpectedly rose in April, signalling that the outlook for the economy may improve towards the end of 2008.
The Dollar has declined to a record low against the Euro, which is helping lower the ever-widening trade deficit, while overseas demand is helping manufacturers cope with the surging cost of raw materials.
U.S exports are keeping the economy from falling into a recession as economic growth stumbles along at the slowest pace in seven years amid the worst housing slump in nearly twenty years.
The revised estimate for U.S gross domestic product will probably confirm that the economy grew 2.6% in the first quarter while the Dollar may come under some pressure as the weekly jobless numbers indicate that the number of Americans filing for unemployment benefits increased to 375,000 last week.
The Pound declines against the Dollar after UK mortgage approvals drop 39% from this stage last year
The Pound succumbed to weaker housing data on Monday and the UK currency recorded a two day slump against the Dollar yesterday after a separate report from the British Banker’s Association showed that mortgage approvals plunged 39% from this stage in 2007.
An earlier report from Hometrack Ltd showed a further decline in UK home values while the Financial Times reported that more than 20% of homebuyers with a poor credit history fell behind on their mortgage repayments in the first quarter of this year.
House prices have slipped for an eighth consecutive month in May and according to Mervyn King, the market is bracing itself for a further reduction over the coming months. The reports combined provide a measure of consumer confidence in the UK, particularly because household spending is largely dependent on borrowing with a high proportion of wealth tied up in property.
The Pound dropped to a low of 1.9718 by the close of trading last night while also recording losses against 14 out of the 16 most actively traded currencies. The worsening state of the UK housing market has added to signs that an economic slowdown will gather in momentum this year and despite speculation that interest rates won’t be reduced further, the Pound may struggle to make gains after falling 8.6% in value against the Euro in just five months.
Nevertheless, the Pound did actually record some modest gains against the Euro, briefly revisiting the resistance at 1.2600 after a spate of weak European economic data showed that consumer confidence in Germany and France fell by more than expected.
An index of sentiment fell to the lowest level in over two years in France, reflecting the surging cost of raw materials while speculation that oil will breach $150 a barrel this year continues to undermine confidence.
Concerns over supply, militant attacks in Nigeria and speculation that traders are manipulating the market has seen the price of oil more than double over the past year, although Crude oil fell as much as $3 yesterday as higher fuel costs sapped U.S demand.
The European Central Bank is under pressure to provide some relief to consumers and relent their hawkish stance on inflation while economic growth forecasts have declined significantly this year following tighter credit conditions and slowing overseas demand.
The decline in oil prices coincided with the Dollar’s upside move against the Pound yesterday while the U.S currency also made gains versus the Euro despite further evidence that the American economy is struggling to cope with rising prices and a worsening housing slump.
The Conference Board’s gauge of consumer confidence slumped to the lowest level since 1992 as the two year decline in the property market showed no signs of abating. The correlation between falling home values and dwindling consumer confidence is by no means a surprise but a separate report the Commerce Department showed an unexpected increase in new home sales.
Although sales increased 3.3% from the lowest level in 17-years, the report also showed that readings for the previous month were revised down as prices dropped in the first quarter by the most in at least 20-years.
The Dollar declines to a 1 month low against the Pound and the Euro as oil prices escalate following a militant attack in Nigeria
Following on from last week, the Pound rose to the highest level in almost a month versus the Dollar after oil prices peaked at a record $135 a barrel while a smaller than expected decline in UK retail sales prompted speculation that the economy will pull through the credit slump.
The dramatic increase in energy prices has seen consumer price inflation breach the government’s 3.0% limit in the past month and subsequently the Bank of England will have little choice but to keep interest rates on hold for the time being.
The Market holiday in England and the U.S means that there was little activity but the Pound came under some pressure after an industry survey showed that house prices declined for an eighth straight month in May.
According to the report from Hometrack Ltd, the average cost of home in Britain slipped a further 0.5% this month and a recent statement from the BoE Governor, Mervyn King, indicated that home values are likely to continue to decline over the coming months.
The Bank of England can’t afford to reduce interest rates while tighter lending conditions have forced lenders to increase mortgage rates and even withdraw some of their best offers altogether.
The Pound dropped to an intraday low of 1.9772 before bouncing back above 1.9800 by the close of trading last night but the resolve in Sterling will be tested this week amid further reports on falling house prices and weakening consumer sentiment.
The Euro has remained within a tight trading range against the Pound but the single currency took advantage of broad Dollar weakness to rise to a near month high yesterday amid a packed week of European economic indicators.
Preliminary estimates for the German economy showed that growth remained resilient in the first quarter despite a strong Euro and slowing demand for European based exports. Elsewhere, the EC sentiment index is expected to show that industrial and consumer confidence declined modestly in May but rising commodity prices means that inflation probably jumped to 3.5% from April.
The Dollar has struggled against the majors recently despite the sharp shift in tone among many economists who believe that the U.S economy is through the worst of the credit crisis and the Federal Reserve can keep interest rates steady after an aggressive period of easing.
However, the dramatic increase in oil prices correlates with the Dollar’s decline and crude oil rallied for a second day amid reports of a militant attack in Nigeria while OPEC’s president ruled out an increase in supplies to provide some much needed relief to the market.
Elsewhere, the Dollar may come under pressure as a report this afternoon is expected to show that the housing slump deepened and consumer confidence fell to the lowest level in 15-years .
The Pound rallies to a three week high against the Dollar as UK retail sales declined by less than forecast
The Pound surged to the highest level in the three weeks against the Dollar yesterday as oil prices peaked and a UK government report showed that retail sales declined by less than anticipated in April.
A dramatic slump in house prices, rising inflationary pressures and the impact of the credit crunch has weighed on consumer spending with sales falling for a second consecutive month in April.
Nevertheless, the Pound rallied against the Dollar, breaching the 1.9800 barrier by the close of trading last night, as the decline in sales was significantly less than forecast and increased optimism that the resilience in spending will pull the economy through the housing slump.
However, the Governor of the Bank of England, Mervyn King, said last week that the economy was in danger of slipping into recession as consumer confidence fell to the lowest level since 1992.
The Pound also rallied against the Euro yesterday, rising towards 1.2600 at the close last night as faster inflation saw the probability of a June rate cut falling to just 1%. The dramatic shift in sentiment saw the Pound rally against 15 out of the 16 most actively traded currencies while the focus will switch to the final estimate of UK gross domestic product with economic growth expected to remain unchanged at 2.5% in the first quarter.
The Dollar’s dramatic intraday slide against the Pound saw the U.S currency plummet to the lowest level since May 2nd yesterday despite speculation that the Federal Reserve will raise interest rates by the turn of the year.
The minutes from the last FOMC meeting showed that policy makers viewed an April rate cut as a “close call” while a recent spate of hawkish comments from a number of Fed officials indicates that policy makers are ready to focus on the upside risks to inflation.
The Dollar snapped a two day losing streak against the Euro yesterday as oil prices finally retreated amid signs that the recent 16% increase isn’t justified by mounting stockpiles and steady demand.
As the price of crude oil breached $135 a barrel early yesterday, OPEC ministers admitted that they were powerless to stop the move despite reports that the rise in prices had more to do with institutional investors coming into the market rather that the issue of supply.
The correlation between rising oil prices and the decline in the Dollar has been increasingly apparent over the past week but the $2 drop in prices yesterday may see the U.S currency resume the upside momentum against the majors.
In terms of economic data, the Dollar shrugged off an earlier report on the U.S housing market as prices fell 3.1% in the first quarter while the weekly jobless numbers indicated that a drop in claims could spur payrolls.
The Pound rallies above 1.9800 versus the Dollar as the price of oil continues to escalate
The Pound extended its run of gains against the Dollar yesterday amid fears that oil prices will breach the $150 a barrel this year while the annual pace of UK inflation will continue to accelerate and force the Bank of England to keep interest rates unchanged over the coming months.
The minutes from the Central Bank’s last policy meeting showed that the MPC voted 8-1 in favour of keeping interest rates on hold in May with the vast majoring of the nine-strong panel arguing that a further cut would risk letting inflation entrench the economy.
The tone of the Bank’s quarterly inflation report paved the way for the hawkish outlook on inflation despite fears that the economy will slip into recession while David Blanchflower was the sole voice for a rate reduction.
The Pound rose 0.2% versus the Dollar following the release of the minutes but the UK currency slipped under 1.2500 against the Euro as the buoyancy of the Euro-zone economy means that policy makers will keep interest rates at the highest level in six years.
Although the MPC appear focused on the upside risks to inflation, a division is brewing within the committee on the extent of the economic slowdown but with consumer prices already at the government’s limit, policy makers are limited in their position to cut interest rates.
The focus this morning will fall on the UK retail sales report and a further dip in consumer spending could end the Pound’s unexpected rally against the Dollar while the CBI industrial trends survey may show a modest pickup in activity levels.
The renewed sense of optimism surrounding the prospects for the European economy has seen the Euro register significant gains against the Pound while the single currency finally broke out of a month long trading range versus the Dollar amid an unexpected rise in German business confidence.
The Ifo sentiment index showed that the survey increased in May as companies pulled through the record surge in oil prices and the dramatic appreciation in the value of the Euro. The business climate report rose to a reading of 103.5 in May despite forecasts of a further decline towards 102.0 and the Euro jumped almost a cent against the Dollar as the report reduced the chances of an ECB rate cut.
The Federal Reserve and the Bank of England have both slashed interest rates in an attempt to boost growth but the resilience of the European economy has even prompted calls governing council member Alex Weber for rates to increase from the current 4.0%.
The price of oil escalated to a fresh record high of $134 a barrel yesterday and the Dollar subsequently extended its biggest decline against the Euro since mid March while a report on the deterioration of the U.S housing market showed that mortgage applications plunged 7.8% last month to equal the lowest number this year.
Despite the improvement in some sections of the economy, the outlook for growth is still bleak as the Fed expects unemployment to increase dramatically over the coming months. In a statement last week, the chairman of the Reserve Bank, Ben Bernanke, warned the downside risks to growth are far from over while the latest housing market numbers indicate that any recovery in the sector could be fragile.
Nevertheless, the Fed still expect economic growth to rebound in the second half of the year as the economy absorbs the robust cut in U.S interest rates but the Dollar may come under pressure in the short-term as the weekly jobless report shows that claims rose to 375,000 last week.
The Dollar declines against the majors as the price of crude oil hits another record level at $1.2960 a barrel
Following the fundamental lack of UK economic data released yesterday, the Pound took advantage of broad Dollar weakness to record the biggest intraday rally in over a month and close above 1.9600 last night.
The UK currency also made significant gains against the Canadian and Australian Dollar as the market began to absorb the Bank of England’s quarterly inflation report and traders scaled back the probability of an interest rate cut in the foreseeable future.
The minutes from the Central Bank’s last policy meeting are released this morning and the focus will fall on the voting pattern of the nine-strong committee while policy makers are expected to be divided in their decision to keep interest rates unchanged in May.
The Pound’s unexpected and short-term upside momentum is unlikely to see the UK currency extend its rally much beyond the current levels and it is no coincidence that the move against the Dollar coincided with the sharp spike in the price of oil.
The Euro has remained in a tight trading range against the Pound this week but the single currency rose above 1.5600 versus the Dollar yesterday and may set a new record high over the coming months as a report from the Bank of Tokyo-Mitsubishi showed that surging global trade will support the world economy and keep the ECB from cutting interest rates.
The Euro rose 1.1% against the Dollar by the close last night and reached the highest level in nearly a month despite separate reports that German investor confidence unexpectedly fell for a second month in May.
The ZEW index showed that investor and analyst expectations declined to the lowest level in 15-years as rising inflation, a strong Euro and the impact of the credit crunch compromises the outlook for economic growth.
However, the ECB are reluctant to change their stance on monetary policy after a report yesterday showed that German producer prices accelerated at the fastest pace in nearly two years last month as the rising cost of raw materials add to concerns over inflation.
The volatile price action surrounding the Dollar yesterday saw the U.S currency record sharp losses against both the Pound and the Euro as the price of oil rocketed to a fresh record high at $129.60 a barrel.
The correlation between escalating crude oil prices and the decline in Dollar sentiment is becoming increasingly apparent and the sharp move yesterday can be attributed to comments from the billionaire hedge-fund manager, Boone Pickens, who said that oil will reach $150 a barrel this year.
The dramatic increase in commodity prices has derailed the Dollar’s upside move for the time being but a report from the U.S labour market yesterday showed that factory prices rose almost twice as much as initial forecasts.
The gauge of inflation shows that a slowing economy is making it difficult for manufacturers to pass on the rising cost of raw materials to the consumer, although prices have risen by the fastest annual rate since 1991.
Rising inflationary pressures means that the Federal Reserve are unlikely to cut interest rates beyond the current 2.0% and that sentiment was emphasised in a statement yesterday by the Vice Chairman, Donald Kohn, who said that the economy should strengthen as the Fed’s aggressive easing of rates is absorbed.
The Pound declined against the Dollar despite reports that UK house prices rose 1.2% in May
The Pound failed to rally against the majors today, dropping back under 1.9500 versus the Dollar, despite a surprisingly positive report on the UK housing market, which showed that prices actually rose 1.2% in May as homeowners refused to succumb to the worsening market environment.
According to the report from Rightmove plc, the average selling price for a home in Britain rose to £242,500 this month with prices rising to 2.2% on the year but the property website warned that the increase was because homeowners were not realistic about the current state of the UK housing market.
The Bank of England have slashed interest rates on three occasions since December and the Governor, Mervyn King, has recently said that prices are set to fall further as the crisis in credit deepens.
In the statement that followed the BoE’s quarterly inflation report, King painted a gloomy picture for the UK economy going forward and said that the decade long economic boom is coming to an end.
Home values have dropped for the first time since 1996 as lenders impose tightening lending conditions and raise mortgage rates to the highest level in eight years. However, the Bank of England can’t afford to cut interest rates any further as inflation threatens to spiral out of control after rising to the government’s 3.0% limit in April.
The declining sentiment surrounding the Euro-zone economy saw the Euro fall against the Dollar this morning while the single currency also failed to rally against the Pound despite yet another round of hawkish commentary from ECB officials.
The President of the Central Bank, Jean-Claude Trichet, thought it was necessary to remind the market about the dangers of rising inflation and likened the recent surge in food and energy prices to the shocking rise in oil during the 1970s.
Aside from the resilience of the German economy, many areas of the Euro-zone have been struggling to cope with higher prices but Trichet believes that a rate cut now could lead to more serious problems going forward.
The price action surrounding the Euro in the aftermath of his comments seems to suggest that traders are becoming immune to the seemingly endless stream of hawkish statements from ECB officials while the worsening economic data indicates the gradual decline of the Euro-zone economy.
Nevertheless, the Euro may find some support against the Pound in the morning as German producer prices may show upside risks to price stability that somewhat vindicate the Central Bank’s hawkish stance on inflation.
The renewed sense of stability surrounding the U.S economy saw the Dollar make further gains against the Pound while also rising by the most in four days versus the Euro after an index of leading economic indicators unexpectedly rose in April.
The Conference Boards’s index increased 0.1% to record the first month-on-month gain since October 2006 and the Dollar rallied amid speculation that the economy has pulled back from the brink of recession.
The report vindicates Hank Paulson’s claim that the U.S economy is through the worst of the credit slump but a recent statement from the chairman of the Federal Reserve, Ben Bernanke, reminded the market that further market volatility may undermine the future outlook for economic growth.
The Pound rallies against the Dollar after hitting a yearly low of 1.9366 amid speculation that the UK interest rates will remain on hold
Following on from last week, the renewed appetite for the Pound saw the UK currency bounce back from an intraday low of 1.9363 versus the Dollar following the release of the Bank of England's quarterly inflation report.
The tone and language used by the Governor, Mervyn King, showed the policy makers are more concerned with the outlook of inflation rather than the diminishing prospects for economic growth.
The statement followed earlier reports on UK producer and consumer prices, which showed that the annual pace of inflation breached the government's 3.0% limit in April.
The overwhelming rise in raw material costs combined with the sharp increase in food and energy prices means that manufacturers have little choice but to pass on higher costs to the consumer.
The Bank's quarterly inflation report has all but ended the speculation surrounding a June rate cut and the Pound has rallied against the majors despite separate reports that the UK labour market deteriorated for the fourth straight month in April.
The focus this week will fall on the minutes from the Central Bank's last policy meeting where the market will be looking for any fresh indication on monetary policy while the retail sales report may undermine Sterling sentiment and emphasise the gloomy outlook for the economy.
The Euro took advantage of broad Dollar weakness and staged a strong rally against it's U.S counterpart while also recording modest gains versus the Pound despite reports that the European trade balance swung into a deficit in March.
A strong Euro is weighing heavily on Euro-zone exports and weakening demand from overseas is likely continue over the coming months with the economy expected to slow to just under 2.0%. A number of ECB officials have continued to express their discontent over the current level of inflation with Liberscher indicating that prices rising above 3.0% are unacceptable.
The staunchly hawkish stance of many ECB policy makers combined with the resilience of the German economy may mean that the Central Bank will refrain from cutting interest rates this year and the Euro may continue to make gains amid a packed week of Euro-zone economic data. The recent revival in Dollar sentiment was severely tested on Friday as the U.S currency fell by the most against the Euro since mid March following a bigger-than-expected drop in the Michigan sentiment survey.
The report showed that consumer confidence in the region had dwindled while record high oil prices raised concerns that the U.S economy will stall. The Dollar declined against the Euro and also bounced off the yearly low at 1.9366 versus the Pound amid fears that the crisis in credit is far from over.
The Euro rallies after economic growth in Germany accelerates at the fastest pace in 12-years
Following the damning testimony from the Governor of the Bank of England on Wednesday, the Pound has been under renewed pressure against the majors amid concerns that UK economic growth will slow to just 1.0%, while a softening labour market and higher prices will lead to a period of stagflation.
UK consumer prices breached the government’s 3.0% barrier last month while record high raw material costs have left manufacturers will little option but to pass on higher costs to the consumer.
In addition, the number of people unemployed and claiming benefits rose for a third consecutive month in April while personal income accelerated beyond initial forecasts and to the highest level since November.
Rising prices and tighter lending conditions means that consumers are forced to demand higher wages and thusly stoke inflation while chocking growth. A separate report from the Royal Institution of Chartered Surveyors showed that the house price balance fell to the weakest level on record as prices declined across Britain.
The Bank of England have revised their expectations for UK economic growth, down from 1.6% to just 1.0% this year and the price action surrounding the Pound reflects the degree of pessimism within the Central Bank.
Despite the staunchly hawkish stance of the ECB’s governing council members, the Euro has continued to decline against the Dollar this week as a distinct lack of economic indicators fail to provide any further insights into the outlook for the Euro-zone economy.
However, the flash estimate of European gross domestic product showed that economic growth accelerated more than forecast in the first quarter. The resilience of the German economy shows few signs of cracking as the strongest pace of growth in 12-years has brought Europe through the credit crisis and left the ECB to focus on the threat of inflation.
Consumer prices have remained above the Central Bank’s comfort zone for eight consecutive months while a robust labour market will support consumer spending as commodity prices rocket to record levels.
In the aftermath of the report, the Euro staged a modest recovery against the Dollar and made further gains versus the Pound amid suggestions that the ECB will keep interest rates unchanged this year.
The renewed appetite for higher yielding assets has seen the Dollar advance against most of the 16 most actively traded currencies but the U.S currency fell yesterday following reports that industrial production contracted by more than twice as much as forecast.
The Empire state manufacturing index also showed that regional activity in the New York State declined unexpectedly in May and the report reinforces Ben Bernanke’s comments earlier this week.
The Fed Chairman insisted that the turmoil surrounding credit markets is far from over and comes in stark contrast to the recent rhetoric from the Treasury Secretary, Hank Paulson, who said that the economy was through the worst of the credit crunch.
The focus today will fall on the Michigan consumer sentiment index, which is expected to show that confidence declined in May as rising unemployment and higher prices restrict spending.
The Pound fails to rally against the majors after the BoE Governor, Mervyn King, indicates that the Bank has finished cutting interest rates
The Pound failed to rally against the majors on Tuesday as the negative sentiment surrounding the UK economy offset the rising inflationary concerns and speculation that the Bank of England can’t afford to cut interest rates in June.
UK producer and consumer prices rose well beyond initial forecast in April with the annual rate of inflation jumping to the highest level in over a year following record high food and energy costs.
The upside risks to price stability came in the build up to the Bank of England’s quarterly inflation today and the Governor, Mervyn King, signalled that the MPC are reluctant to continue cutting interest rates while economic growth will slow to just 1.0%.
In a much publicised statement, King said that inflation will breach the government’s 3.0% limit this year and rise to 3.7% over the coming months as rising commodity prices means that the Bank face a difficult balancing act in the months ahead.
The tone of the statement seemed to suggest that a further reduction in rates would make matters worse with a drop towards 4.5% exasperating the already severe inflationary concerns.
The Futures market has scaled back the probability of a June rate cut in the aftermath of King’s comments while a recent spate of damning economic reports shows that the slump in housing is pulling down economic growth.
The tone of the Bank’s quarterly inflation report mirrors the recent commentary from the Chancellor, Alistair Darling, who back the BoE’s stance on inflation and expressed his concerns on rising food and energy costs.
The price action surrounding the Pound suggests that the market is focused on the downside risks to growth rather than upside risks to inflation and the UK currency plunged 0.3% versus the Dollar before staging a modest recovery.
The fundamental lack of economic data released in the Euro-zone means that the single currency has been susceptible to events from overseas but the focus tomorrow morning will fall on the final estimate of the Harmonised index of consumer prices.
The broadest measure of inflation across the 15 nations that share the Euro will probably show that prices increased 0.3% in April to an annual pace of 3.3%. A separate report on Euro-zone gross domestic product will also confirm that growth in the economy fell under 2.0% in the first quarter and confirm that the U.S led economic slowdown is filtering through to Europe.
The dramatic revival in Dollar sentiment continued today as the U.S currency traded near the highest level in a week versus the Euro as gains in stocks led to a renewed appetite for higher yielding assets.
Elsewhere, the Dollar gained in support and rose to the highest level this year versus the Pound before a government report showed that U.S inflation accelerated less than forecast in April.
Consumer prices increased 0.2%, following a 0.3% gain the previous month, and suggests that the Fed can enter a period of monetary stability after slashing rates by 325 basis points in a vain attempt to bring some stability to the U.S housing sector.
The Dollar rallies against the majors after U.S retail sales increase more than forecast
The Pound enjoyed a strong intraday rally against the Dollar on Monday as UK producer prices accelerated at the fastest pace in 22-years last month and showed that manufacturers have little choice but to pass on record high raw material costs to the consumer.
The report sparked a mini revival in Sterling sentiment as rising inflationary pressures make it difficult for the Bank of England to begin a prolonged period of monetary easing. However, the Pound resumed the downward momentum against the Dollar today, dropping ever closer towards the yearly low at 1.9388.
The downside momentum also continued against the Euro despite another round of particularly hawkish inflationary data. The Consumer Price Index, which is widely regarded as the broadest measure of inflation, showed that prices rose 3.0% from this stage last year to report the biggest monthly increase since 2002.
Rising food and energy costs have stoked inflation but the report massively exceeded initial forecasts and will force the Governor of the Bank of England to write a letter of explanation to the government. The two reports combined have sparked controversy that the real threat to the UK economy is inflation and the MPC may need to rethink their plans of a June rate cut.
The Pound rose as much as 0.3% against the Dollar in the minutes that followed the report but failed to consolidate on those gains as the Futures market continues to price in a 81% chance of a 25 basis point reduction next month.
The outcome of the June meeting should become clearer after the Bank of England’s quarterly inflation report tomorrow morning, which should be hawkish in tone given the recent commentary from Mervyn King and the dramatic increase in consumer prices.
The Euro has been susceptible to a barrage of weak data in recent weeks and the single currency has continued to decline against the Dollar while taking advantage of broad Sterling weakness to close tonight under the 1.2600 level.
A number of European Finance officials continue to focus on the upside risks to price stability while also recognising that record high food and petrol prices will weigh on consumer spending.
Euro-zone retail sales dropped by the most since records began in March while the cost of oil has nearly doubled over the past year and reached another record high $1.2698 a barrel.
The surge in commodity prices prompted ECB governing council member, Jean-Claude Juncker, to reiterate that “inflation remains a major concern”. That sentiment was reflected by the President of the Central Bank, Jean-Claude Trichet, who said that inflation will remain high for some time, which indicates that the ECB are in no hurry to reduce interest rates.
In terms of economic data, the Euro may come under some pressure tomorrow morning as a gauge of industrial production is expected to show a further softening in output for March.
The Dollar rebounded from a four day losing streak versus the Euro and also registered further gains against the Pound after a government report showed that U.S retail sales exceeded initial forecasts in April and added to speculation that the Federal Reserve will stop cutting borrowing costs.
The resilience in consumer spending will help support economic growth this year amid continued weakness in the housing and non-manufacturing sectors. Sales rose 0.5% last month, following a revised 0.4% increase in March, and the Dollar rallied against most of the 16 most actively currencies amid speculation that economy will pull back from the brink of recession.
Elsewhere, the Dollar stood firm as the Fed Chairman, Ben Bernanke, did his best to supper the renewed optimism surrounding the outlook for the U.S economy. In a speech in Atlanta today, Bernanke said that the turmoil surrounding financial markets is far from over and that the Reserve Bank will increase its monthly auction of emergency funding.
His comments are in stark contrast to a recent testimony from the Treasury Secretary, Hank Paulson, who said that the worst of the credit crisis is behind us.
The Pound rallies against the majors as UK producer prices increase at the fastest pace in 22-years
The Pound rallied against the majors yesterday, rising from a three month low versus the Dollar, while also registering gains against the Euro following an unexpected surge in U.K producer prices.
The report from the Office of National Statistics showed that UK factories raised prices at the fastest annual pace since records began in 1986, indicating that a sharp increase in the cost of raw materials will stoke inflation.
In the aftermath of the report, Bonds plunged and the Pound rallied as the sharp rise in factor-gate inflation emphasised the recent statement from the BoE Governor, Mervyn King, who said that commodity price gains will push inflation through the government’s 3.0% limit.
The Bank’s Monetary Policy Committee face a difficult balancing act in the months ahead but the quarterly inflation report this morning should provide a further insight into the probability of a June rate cut.
The nine-strong committee left interest rates on hold at 5.0% in May after implementing three quarterly reductions since December. The Pound enjoyed a sharp intraday swing against the Dollar, rising as much as 0.5% by the close of trading last night and the UK currency could extend its run today with consumer prices expected to increase to 2.6% year-on-year in April.
However, a separate report on the UK property market will show that prices fell in March while the BRC retail sales survey is expected to confirm that tighter lending conditions is restricting spending.
The renewed appetite for the Dollar has gathered momentum in recent weeks as the U.S currency rose to the highest level since February against the Pound while appreciating 3.4% versus the Euro following the G-7 meeting in March.
The representatives highlighted the Dollar’s severe decline in value and emphasised their concerns over volatile moves in the currency market. It is surely no coincidence that the Dollar has rallied in the weeks that followed the meeting and for the first time since December 2005, traders are becoming increasingly confident that the Fed will refrain from lowering interest rates in June.
The bullish sentiment surrounding the Dollar is likely to continue despite a host of negative economic data as the focus switches to the retail sales report this afternoon. Rising consumer prices and falling home values has restricted spending with sales expected to show a 0.1% fall in April.
The Pound declines to the lowest level in 11 weeks versus the Dollar amid speculation of a June interest rate cut
Following on from last week, the Pound came under further pressure against the majors, falling to the lowest level since February against the Dollar, amid speculation that the Bank of England will cut interest rates by a further 25 basis points in June.
The Monetary Policy Committee, led by the governor Mervyn King, met last week and elected to keep the benchmark lending rate on hold at 5.0%. Rising inflationary concerns and a hawkish financial stability report have convinced policy makers to wait and assess the impact of three previous rate reductions while consumer prices look set to increase dramatically over the coming months.
The Pound also fell for the first week in a month against the Euro as tighter lending conditions saw the biggest drop in consumer spending in at least four years while a faltering economy may lead to a prolonged period of monetary easing.
The pessimistic outlook for the UK economy shows few signs of abating as a separate report on Friday added to recent evidence that the housing market is slowing after ten consecutive years of growth.
House prices fell 2.5% in March while courts issued the highest number of orders for home repossessions since the end of the last recession in 1992. Elsewhere, the Pound is likely to struggle against the majors in the near-term as a slowdown in manufacturing and consumer confidence fuels speculation of a June rate cut.
The focus this week will switch to the Bank of England’s quarterly inflation report on Wednesday and given the recent increase in commodity prices, the tone and language used in the statement will be heavily scrutinised for any clues on future policy.
The renewed appetite for the Euro gathered in momentum towards the end of the last week as the single currency registered gains against most of the 16 most actively traded currencies following the ECB interest rate announcement and press conference.
The Central Bank’s President, Jean-Claude Trichet, said that inflation remains the top priority over the coming months while the language used in the statement seemed to indicate that interest rates will remain on hold over the coming months.
The European Union has said recently that retail sales have fallen 1.6% over the past month while oil prices rose to a record $126 a barrel on Friday as soaring fuel prices weighs on confidence. However, the annual pace of inflation has accelerated to 3.3% in March and the latest figures are forecast to show an even bigger increase in April.
The final estimate of Euro-zone consumer prices probably rose to 3.6% in April, well above the Central Bank’s 2.0% target, and vindicate the ECB’s decision to keep interest rates steady amid the ongoing crisis in credit.
The Euro may find further support this week as a hawkish inflation report may coincide with the latest quarterly GDP numbers and the index is expected to show that activity levels are holding up reasonably well in the face of a U.S led economic slowdown.
The renewed appetite for the Dollar saw the U.S currency extend its recent run against the majors, consolidating around the highest level in two months versus the Euro while sailing through the trend support at 1.9650 against the Pound to close at the highest rate in 11-weeks.
The renewed sense of optimism surrounding the Dollar can be attributed to speculation that the Federal Reserve will leave interest rates unchanged in May after reducing borrowing costs by 325 basis points in just six months.
The daily fundamentals have painted a rather gloomy picture for the U.S economy but the Dollar found some support on Friday as the U.S trade deficit narrowed by more than anticipated in March despite a slump in overseas demand.
The Dollar’s resilience to a seemingly endless line of weak economic reports also comes in the aftermath of the G-7 meeting last month where officials outlined their concerns over the Dollar’s dramatic drop in value over the past year.
The Dollar had fallen to the lowest level on record against the Euro but in the weeks that followed the G-7 meeting, the U.S currency has advanced 3.4% from the 1.6019 low. The idea that the Dollar is stabilizing has prompted U.S and European officials to express their satisfaction over the recent upside momentum and that may see the Dollar make further gain against the majors this week.
The Pound remained largely unchanged against the majors yesterday after the BoE left interest rates unchanged at 5.0%
The Pound has struggled against the majors this week as the focus switched to the Bank of England interest rate announcement yesterday and the UK currency plummeted to a near three month low versus the Dollar following speculation of a surprise quarter-point reduction.
A recent spate of negative economic reports has undermined the Bank’s optimistic financial stability report as house prices suffered the first annual decline since 1996 and consumer confidence plunged to the lowest level in five years.
The Monetary Policy Committee have lowered UK interest rates on three occasions since the turn the year in a vain attempt to bring some stability to the market while the crisis in credit shows few signs of slowing.
Lenders have been forced to raise mortgage rates and even withdraw some of their best offers from the market as losses linked to the U.S subprime mortgage crisis caused the first run on a UK Bank in nearly a century.
However, the Bank of England elected to keep the benchmark lending rate unchanged at 5.0% yesterday as record high oil prices threaten to fuel inflation. In the wake of the April rate cut, the minutes from the Bank’s last policy meeting showed that two members out of the nine strong committee voted in favour of a greater 50 basis point reduction last month.
The extent of the division with the Bank of England will not be fully exposed until the minutes of the May meeting are released later this month and the Pound may come under further pressure over the coming weeks amid suggestions of a June rate cut.
In the aftermath of the BoE rate announcement, the European Central Bank also held rates unchanged in May and the Euro rebounded from a two month low against the Dollar after the tone of the Central Bank’s accompanying statement showed that inflation remains the top priority.
The resilient of the Euro-zone economy combined with the ECB’s staunchly hawkish stance on inflation has seen the single currency appreciate to record highs against both the Pound and the Dollar this year and the report yesterday showed that policy makers are in no hurry to begin cutting interest rates.
The Chairman of the Central Bank, Jean-Claude Trichet, seemed to ignore the downside risks to economic growth and said that inflation will stay above 3.0% “for a rather protracted period”.
An EU report earlier this week showed that retail sales fell to the lowest level since the series began in 1995 to indicate that consumers are struggling with record high energy costs. However, the European Central Bank will probably hold rates steady at 4.0% over the coming months and retain a tightening bias until the fastest pace of inflation in 16 years shows some signs of slowing.
The Dollar rose to the highest level since February against the Pound and bounced off the support at 1.9500 before a report from the Commerce Department showed that wholesale inventories unexpectedly declined in March following a dramatic increase in oil prices and shorter supplies.
The modest 0.1% drop represents the first reduction since December 2006 and the report provides an indication that consumers are struggling with record high fuel costs while falling home values has restricted spending.
The U.S Treasury Secretary, Hank Paulson, has recently said that the economy is through the worst of the credit crisis but the latest figures show that the gross domestic product grew at the slowest pace since the last recession in 2001.
The Dollar has found some support this week amid speculation that the Federal Reserve will keep rates unchanged this month but a softening in the labour market, rising foreclosures and dwindling confidence may see the Dollar struggle to extend its rally beyond the current levels as the economy stands on the brink of recession.
The Pound declined against the Dollar yesterdy, falling to the lowest level since February
The Pound has been under real pressure against the majors this week and the UK currency plummeted through the trend support at 1.9650 against the Dollar to close last night at the lowest level in nearly three months.
The Pound also fell for a third straight day against the Euro after an industry report showed that UK consumer confidence declined to the weakest in at least four years last month. According to the report from the Nationwide Building Society, an index of consumer sentiment fell to the lowest level since the survey began in May 2004 and speculation has intensified that the Bank of England may bring forward their next interest rate reduction.
In addition, the Pound extended its losses versus the majors after a separate report from the Office of National Statistics showed that UK manufacturing unexpectedly declined in March. Factory output fell 0.5% from the previous month as the turmoil in credit markets swept through the economy, while higher commodity prices and a weaker currency means that inflation will probably exceed the Bank’s 2.0% target for the remainder of 2008.
Renewed concerns over inflation has coincided with the price of oil rocketing through $122 a barrel and the recent commentary from a number of MPC officials suggests that policy makers will resist cutting rates this afternoon with the next likely move coming in June.
The Euro traded in a very tight trading range against the Dollar yesterday but the single currency may resume its recent downward trend amid speculation that the ECB will focus on the downside risks to economic growth and soften their stance on inflation.
A spate of negative economic indicators has paved the way for the Central Bank to begin a period of monetary easing as cracks begin to appear in the Euro-zone economy after the fallout from the seizure in credit markets.
However, consumer prices have remained well above 3.0% over the past four months and with commodity prices climbing to record highs in recent weeks, policy makers will have little choice but to keep rates on hold at 4.0%
The European Central Bank face a difficult balancing act in the month’s ahead and the Euro has been under pressure as traders speculate on the timing of the first interest rate cut. In terms of economic data, European retail sales plunged 1.6% in March to record the biggest monthly decline since records began in 1995 as consumers struggled with record high food and fuel prices. The latest report from the European Union only compounds economists worst fears and indicates that the economy is slowing under the weight of a U.S led economic slowdown.
The revival in Dollar sentiment gained in momentum yesterday as the U.S currency rose to the highest level since February against the Pound amid suggestions that the Federal Reserve will keep interest rates on hold in May.
Despite another decline in pending home sales, the Dollar shrugged off a host of weak economic reports to record gains against the majority of the 16 most actively traded currencies. As the focus switches to events in the U.K and Europe today, the Dollar may continue its upside momentum in the near-term amid suggestions that the worst of the credit crisis is over.
The Pound declines against the majors as UK service sector growth weakens to the slowest pace in five years
The Pound Rose to the highest level since February against the Euro last week but the UK currency relinquished much of the gains yesterday following a disappointing report on service sector growth.
An index of business sentiment showed that growth in UK service industries unexpectedly slowed to the weakest pace in five years in April as the turmoil surrounding credit markets hampered economic growth.
The report from the Chartered Institute of Purchasing and Supply fell to a reading of 50.4 last month, the lowest since March 2003, with a figure above 50 indicating expansion. A spate of surprisingly positive economic reports coupled with the hawkish tone of the Bank of England’s financial stability report have all but ended the prospect of a further cut in UK interest rates this month but the drop in services suggests that the Bank may need to act in June.
The Pound also declined against the Dollar in early trade, bouncing off the support at 1.9650 before a close towards the intraday high at 1.9750. The UK economy is in a period of slower growth while tighter lending restrictions will see the slump in housing lead to an inevitable slowdown in consumer spending.
However, UK consumer prices are forecast to hit 3.0% this year and rising inflationary pressures means that the Bank of England are unlikely to follow the Fed in an aggressive period of monetary easing and that may support the Pound in the short-term.
The Euro has risen for a second consecutive day versus the Dollar while the single currency also registered gains against the Pound amid speculation that the ECB will retain a hawkish stance on monetary policy and hold interest rates at the highest level in six years.
The Euro has enjoyed the biggest intraday move in two weeks against the majors as the ECB President, Jean-Claude Trichet, gave a very public reaction to the soaring price of oil. The economic outlook has soured in recent weeks as the ECB finally acknowledged that Europe is no longer immune to the credit crisis, leading to speculation that the Central will lower interest rates this year.
However, food and energy prices continue to rise and the cost of oil has remained above $120 a barrel, which means that the ECB’s accompanying statement should emphasise the ongoing risks to inflation and provide some support to the Euro.
In terms of economic data, the focus this morning will fall on European retail sales for March with the index expected to report a 0.2% increase and provide a further indication that tighter lending conditions is weighing on consumer spending.
The fragility surrounding the Dollar was exposed perfectly yesterday as the U.S currency relinquished earlier gains against the both the Pound and the Euro amid a mixture of weaker economic reports and soaring commodity prices, which threaten the pace of economic growth.
Oil prices reached another record high yesterday, surging past $122 a barrel, as rising producer costs stoke inflation and a provide a difficult balancing act for the Federal Reserve. Although the Dollar is still 3% higher against the Euro from this stage in April, the prospect of the U.S currency extending its rally beyond the current level looks increasingly unlikely.
A number of major U.S banks are reporting massive first quarter deficits as the Washington based company, Fannie Mae, said that its credit market losses will be worse next year than in 2008 after rocketing to a larger than forecast $2.19 billion.
The world’s biggest banks and securities firms have slashed 65,000 jobs in the past 10 months and the latest revelation has prompted speculation that the Fed will have to continue lowering interest rates beyond the current 2.0%.
The Dollar declines against the Euro after crude oil advances to the highest level on record
Following on from last week, the Pound has gained in momentum against the Euro, breaching the 1.2800 barrier on Friday, to record a third weekly advance against its European counterpart amid speculation that the worst of the credit crisis is over and a rebound in risk appetite will return to the market.
The FTSE 100 index has continued its longest run of gains since October and the Pound rallied after the Bank of England’s financial stability report showed that policy makers were becoming increasingly optimistic that the worst of the credit crunch is behind us.
The tone and language used in the statement suggests that a divided Bank of England will resist cutting interest rates this week with a possible 25 basis point reduction in June. The short-term momentum surrounding the Pound has seen the UK currency rise to the highest level since February against the Euro but the prospects of this rally extending beyond the current levels largely depend upon a break above 1.3000.
However, the recent economic figures supports the view that the UK economy is still in trouble and the latest housing numbers showed that prices have posted the first annual decline since 1996, while construction contracted to the lowest level in a decade.
The tentative price action surrounding Cable has seen the Pound struggle to stay above 1.9900 against a resurgent U.S Dollar but the focus will switch to the Bank of England interest rate announcement on Thursday.
The prospects of the MPC keeping rates on hold has heightened significantly since the Bank’s financial stability report and we may have to wait for the quarterly inflation numbers or the minutes of the meeting released later this month for any further indication of policy.
The Euro has been susceptible to a spate of weakening economic reports while concerns are growing within the ECB that the U.S led economic slowdown will spread throughout the Euro-zone economy, leading to an inevitable cut in interest rates.
The single currency rallied to a record high versus the Dollar last month but on Friday the Euro had declined to the lowest since February and made widespread losses against most of the 16 most actively traded currencies.
European manufacturing fell for a third straight month in April as the credit crunch sapped global demand while a strong Euro and rising commodity prices means that manufacturers have little choice but to pass on higher costs to the consumer.
Industrial production is faltering and overseas demand has declined while the Euro’s 6% gain in value against the Dollar is making European exports less competitive. The ECB’s governing council are due to convene this Thursday and the members are expected to keep rates on hold, while the accompanying statement should be hawkish in tone considering that inflation remains well above the Central Bank’s 2.0% target.
The shift in sentiment surrounding the economy has seen the Dollar extend its recent run against the Euro in recent weeks but the U.S currency weakened across the board yesterday despite an unexpected surge in service sector growth.
The Institute of supply Management released its monthly index of non-manufacturing companies, which unexpectedly grew for the first time since December. The report is just the latest indication that the U.S economy is weathering the credit crisis and the downturn in job growth while a jump in retail sales later this month would give the Federal Reserve the premise to keep interest rates unchanged in May.
The Dollar’s failure to rally in the aftermath of the report yesterday coincided with the price of oil skyrocketing to the highest level on record at $120 barrel as news filtered through of an attack on a Nigerian oil station, while a rebound in service sector growth signals increased demand for energy use.
Data Released 6th May
U.K 09:30 CIPS Services PMI (April)
EU 09:00 Services PMI (April) EU 10:00 Producer Price Index (March)
The Pound rises above 1.2800 versus the Euro following the release of the semi annual financial stability report
The Pound has been making steady gains against the Euro over the past week and the UK currency climbed to the highest level in more than an a month yesterday after the Bank of England released its semi-annual financial stability report.
The tone and language used in the statement signalled that the worst of the UK credit crisis may be over and the Pound subsequently rallied against the Euro as the Central Bank added that “risk appetite will return gradually in the coming months.”
The optimistic commentary from the Deputy Governor of the BoE, John Gieve, almost mirror yesterday’s comments from U.S Treasury Secretary Henry Paulson, who said that the credit crisis may be more than half over and that confidence was slowly returning to the market. The recent revival in Sterling sentiment was extended further as a separate report from the Chartered Institute of Purchasing and Supply showed that its UK producer price index rose to the highest level on record.
The price of oil has risen to a high of $119 a barrel in recent weeks and the cost of food has also risen to record levels, forcing manufacturers to pass on higher prices to the consumer and stoke inflation.
UK consumer prices are forecast to hit 3.0% later this year and with the Bank of England more upbeat about the prospects of a recovery, the chances of a back-to-back interest rate cut in May is looking less likely by the day.
The Euro is poised to record a weekly loss against the Dollar after falling to the lowest level since February yesterday and the single currency may continue to struggle today as German retails sales are expected to reflect a sharp deterioration in consumer sentiment.
The Purchasing Managers’ Index on European retail growth contracted for the first time this year while a strong currency, record high oil costs and tightening credit conditions means that the ECB may be pressurised into cutting interest rates before the turn of the year.
The Dollar rose to the highest level in over a month against the Euro yesterday and also registered gains versus Sterling as the fallout from the FOMC rate decision provoked speculation that the Federal Reserve will stop cutting interest rates and enter a period stability.
The Fed have cut rates from 5.25% to 2.0% in an aggressive period of monetary easing but the accompanying statement on Tuesday showed that two policy makers actually elected to keep interest rates on hold this month while an entire text on the downside risks to growth was removed altogether.
The renewed sense of optimism shown by the Fed has led many economists to believe that the worst of the credit crisis is over while the Dollar actually rose 1.1% against the Euro yesterday, matching the strongest level since March 25th.
In terms of economic data, the Dollar also found further support yesterday as U.S consumer spending rose above initial expectations in March, underling an emerging threat of inflation. The Fed’s preferred measure of inflation accelerated 0.4% from the previous month while a separate report from the Labour Department showed that claims for unemployment benefits rose by more than forecast last week.
The number of jobless claims soared to the highest level since April 2004 and the report may provide a little insight into Non-Farms this afternoon, which is expected to show that the unemployment rate increased to 5.2%.
Dollar buyers would be well placed to work a stop order in the market prior to the announcement because a larger than expected increase in payrolls could spark a Dollar rally and increase speculation that the Fed have done their job in shoring up the future outlook of the economy.
The Dollar holds steady as the FOMC cut interest rates by a further 25 basis points
Despite a host of negative economic reports, the Pound staged an unlikely rally yesterday amid reports that HBOS PLC plan to announce a £4 billion rights issue that is designed to help the bank bolster its balance sheet.
As we build up to the Bank of England interest rate announcement next week, the Pound has been susceptible to a barrage a weak data that has increased speculation of a back to back rate cut in May.
The minutes from the Bank’s last policy meeting showed that six out of the nine policy makers, including the governor, Mervyn King, favoured a 25 basis point reduction in rates. However, house prices have fallen 2.5% in just a month and a report yesterday from the Nationwide Building Society showed the first annual decline in prices since 1996.
The credit crunch has weighed heavily on the UK property market and tighter lending conditions has seen Banks approve the fewest number of new loans since records began in 1999. Just one member of the BoE’s monetary policy committee favoured a greater 50 basis point reduction in April and yesterday David Blanchflower said that house prices may fall by a third over the next year while consumer confidence fell to the lowest level since 1992.
The speculation surrounding the May interest rate announcement may see the Pound come under further pressure in the short-term and Euro buyers would be placed to take advantage of the current rate or at least place a stop order in the market to prevent a further move to the downside.
The Euro is poised to record its first weekly decline against the Dollar since February while the single currency has also lost significant ground versus the Pound amid suggestions that the ECB may finally acknowledge the risks to growth as cracks begin to appear in the Euro-zone economy.
Business and consumer confidence has deteriorated in the month of April and consumer prices dropped beyond expectations in Germany, suggesting that inflation is beginning to subside in Europe’s largest economy.
The EC business climate index showed that confidence had declined to a two year low in April as the Euro’s unrelenting appreciation combined with record high food and energy costs threaten the pace of economic growth.
The Euro-zone has been largely resilient to the fallout from the U.S subprime mortgage collapse but the latest figures suggest that consumers and companies are beginning to struggle with higher credit costs.
The European Central Bank have so far remained defiant in their staunchly hawkish stance on inflation but the tone of the next press conference will be of particular interest as speculation builds of exactly when the Central Bank will implement a rate cut in order to provide some relief to the financial system.
The tension surrounding the FOMC rate decision saw the Dollar trade in a very tight range against the Euro yesterday while the U.S currency again bounced off the trend support at 1.9650 versus the Pound as the focused switched to the evening announcement. The recent revival in Dollar sentiment had been largely due to speculation that the Fed would refrain from lowering interest rates in April and keep the benchmark lending rate on hold at 2.25%.
The FOMC did indeed cut rates by a further 25 basis points last night but the Dollar failed to decline as the market appeared disappointed that the Reserve Bank did not implement a more aggressive cut.
However, the accompanying statement would always be heavily scrutinised as the tone and language of the report seemed to suggest that the Fed had done its job in lowering rates to shore up the future outlook for the economy.
Two members of the Fed’s Open Market Committee elected to keep rates on hold this month while an entire commentary on the downside risks to growth was completely removed from the statement.
The Dollar has remained largely unchanged in the aftermath of the announcement but the focus will now switch to the monthly U.S job report on Friday with unemployment expected to increase to 5.2%.
Data Released 1st May U.K 09:30 CIPS Manufacturing PMI (April) U.K 09:30 Financial Stability Report U.S 13:30 Jobless Claims (w/e 25th April) U.S 15:00 Construction Spending (March) U.S 15:00 ISM Manufacturing (April)
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