Market News

GBPEUR/GBPUSD

The Pound declined heavily against the higher-yielding currencies, as an element of confidence returned to financial markets, despite widespread concerns over the spread of swine flu. The UK currency rallied to a high of $1.4812 against the U.S Dollar, as the rise in risk appetite diminished the allure of U.S assets as a haven.

UK stocks advanced, led by a rebound in banking shares and metal producers, after HSBC Holdings plc recommended Barclays Plc and Lloyds Banking Group Plc. The FTSE 100 Index jumped 2.3% on the session, as Barclays, the U.K’s third-largest bank, and Lloyds allied over 8% to wipe out two consecutive days of declines.

The UK benchmark index has rebounded 19% from its low this year on March 3rd, amid optimism that the worst of the global recession may be over. However, the FTSE is still down over 37% since June 2007, as banks in Europe reported more than $395 billion in net credit losses. Global stocks declined earlier this week on concerns that U.S lenders will need to raise additional capital and the outbreak of swine flu will hamper economic activity.

The Pound dipped to lows just under 1.1100 against the Euro yesterday and gilts rose, after the Chancellor of the Exchequer Alistair Darling said that UK interest rates would remain at record low levels. The two-year yield fell to close to its lowest level in almost four months, as Darling said in a conference to business leaders that interest rates were “low and likely to remain low”.

The Bank of England have cut UK interest rates by 4.5 percentage points since October to the lowest level in history at 0.5%. Policy makers have also embarked on a period of quantitative easing, through the creation of new money to purchase government and corporate bonds. The BoE confirmed on March 5th that it will buy up to £75 billion of toxic assets, as part of the asset insurance program.

The Pound will continue to make gains against the Dollar in the near-term as the aggressive swings in risk sentiment continue to dominate the market. The UK currency may also find some support against the Euro, amid the release of key economic data. The Gfk gauge of consumer confidence is expected to show an improvement in sentiment for April, while a separate report from Nationwide will probably report a modest increase in UK house prices.

EUR/USD

The Euro rallied above $1.3300 against the Dollar yesterday but the single currency may struggle to maintain its momentum, amid speculation that the U.S economy will recover faster than the Euro-zone. According to estimates from Commerzbank AG, the Euro’s advance may come to an abrupt end between $1.3315 and $1.3330.

European retail sales declined the least in 11-months in April, after further government stimulus packages improved consumer confidence and encouraged shoppers back to the high-street. The Purchasing Managers’ index showed that a measure of retail sales rose to a reading of 48.4, from 44.1 in March, as governments fight the worst recession since the Second World War.

Inflation has fallen below the ECB’s target of 2%, which has boosted household spending, but the impact may be limited as rising unemployment takes its toll. Retail sales in Germany have fallen at the slowest pace since May 2008, while sales have also declined at a slower pace in Italy and France.

A separate report yesterday showed that European confidence in the economic outlook increase for the first time in 11-months in April. The surprisingly upbeat tone of the report has fuelled hopes that the economy may now be past the worst of the recession but “with Euro-area domestic demand likely to remain weak, any resumption in growth may have to wait for world demand to recover.”

The European Central Bank have refused to cut interest rates as aggressively as the Bank of England the Federal Reserve. Policy makers are debating on whether to follow their counterparts in buying assets to combat the economic slump and engage in some method of quantitiative easing. The governing council committee are split on how aggressive to be at a time when interest rates are already at a record low of 1.25%.

The Dollar failed to find any support against both the Pound and the Euro, even after U.S gross domestic product plunged again in the first quarter. The economy contracted a greater-than-expected 6.1% annual pace, after contracting 6.3% in the last three months of 2008. The report from the Commerce Department reflects the worst recession in at least half a century, as inventories slumped and further declines in the housing market exacerbated the slowdown.

The Federal Reserve have refrained from increasing the purchases of Treasuries and mortgage-backed securities, saying that the economy is showing some signs of recovery. Household spending has increased but remains constrained due the escalating job losses and tighter credit conditions.

Data Released 30th April

U.K 00:01 Gfk Consumer Confidence Survey (April)

U.K 07:00 Nationwide House Prices (April)

GER 09:00 Unemployment (April)

EU 10:00 Flash HICP (April)

EU 10:00 Unemployment (March)

U.S 13:30 Employment Costs (Q1)

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

U.S 13:30 Personal Income / Consumption (March)

– Core PCE

U.S 14:45 Chicago PMI (April)

writtenb y Adam Solomon

GBPEUR/GBPUSD

Good Morning,

The Pound remained largely unchanged against the Dollar yesterday, while the UK currency recorded gains against the majority of the 16-most actively traded currencies, after a report from the Confederation of British Industry showed that UK retail sales rose to the highest level in 15-months. A survey of retailers showed a net 3% reporting higher sales in April, compared with 44% saying that sales had fallen in March.

An index of retail sales rose to the highest level in more than a year, as stores overcame the recession and the rising unemployment rate. Recent economic data has indicated that the worst recession since Margaret Thatcher came to power in 1979 has started to ease, as shoppers sustained spending, even after the number of people out of work exceeded the highest level since 1997.

Andy Clarke, chairman of the CBI Distributive Trades Panel said that while the figures were encouraging, they did not mark a recovery on the high street. “With unemployment rising and growth in average earnings down, consumers remain very wary and retailers themselves think that sales will drop again in May.”

The Chancellor of the Exchequer Alistair Darling said last week that he expects the UK economy to recover by the end of the year. However, the Pound was rocked amid speculation that Moody’s investors services will cut the UK’s AAA credit rating, following concerns over the state of British finances. The International Monetary Fund still expects the economy to contract this year at the fastest pace in sixty years.

The Pound held on to recent gains made against the Euro yesterday, despite a drop in the UK stock market, as speculation surrounding the global swine-flu outbreak and the implications for the global economy. Banking stocks also slid on concern they may need to shore up their balance sheets. The FTSE 100 Index decreased 1.7% on the day, as HSBC Holdings Plc lost 2%, following reports that Bank of America Corp and Citigroup Inc may be forced by regulators to raise more capital.

Global financial markets will remain nervous until there is more clarity over the threat posed by the swine flu outbreak and the high-yielding currencies have all declined against the Pound, apart from the South African Rand. The Rand also rose to the highest level against the U.S Dollar since October 3rd, on speculation the central bank will slash interest rates again this week to help fuel spending and bolster growth.

The Pound will continue to gain ground against the majority of the majors if there is an improvement in risk appetite, but there will still be very important risks associated with the escalating debt burden and volatility is likely to increase. A slightly more positive stance towards the global economy has seen the Pound test resistance levels above $1.4700 against the Dollar this morning.

EUR/USD

The overall improvement in risk sentiment also saw the Euro advance significantly against the U.S Dollar last night. The single currency found support below the $1.3000 level, but confidence recovered later in the day, amid an increase in risk appetite, which curbed demand for the Dollar. European stocks initially declined on concerns that banks may need to raise additional capital and the outbreak of swine flu will hamper an economic recovery.

Elsewhere, European Central Bank governing council member Lorenzo Bini Smaghi displayed a reluctance to cut interest rates towards zero per cent. He also said that buying government bonds would pose a problem to the Central Bank. “Bringing the main policy rate too close to zero would risk hampering the functioning of the money markets as it would reduce the incentives for interbank lending”.

Although Bini Smaghi stressed that his comments were “in no way a pre-judge” to the ECB policy meeting on May 7th, the tone of his statement indicates that the committee are still split on the best way to handle the worst recession since the end of the Second World War. He did express preference for measures already implemented by the ECB, aimed at relaxing banks’ collateral and funding constraints.

The Euro will remain very sensitive to policy comments ahead of the governing council meeting next week and any suggestion that the bank will not pursue quantitative easing methods would help strengthen the Euro. As global risk appetite improved, the single currency moved towards highs around $1.3200 against the Dollar, ahead of the FOMC interest rate announcement this evening.

The Dollar fell against the majority of the higher-yielding currencies, after consumer confidence in the U.S jumped by the most since 2005 in the figures for this month. The Conference Board’s index of sentiment rose more than initial forecasts to a five month high, as stocks rallied, mortgage rates dropped and Americans anticipated more jobs would become available.

Elsewhere, a seperate report showed that the decline in home prices in 20 U.S cities slowed in February for the first time since 2007, with the S&P;/Case Shiller index of prices posting an 18.6% decline from the same month a year previously. The Dollar remains predominantly sensitive to swings in risk sentiment, after yesterday’s reports signaled that the grip of the recession is loosening.

Data Released 29th April

EU 09:00 M3 / 3 Month Moving Average (March)

EU 10:00 EC Business Climate (April)

EU 10:00 EC Economic Sentiment (April)

- Consumer / Industrial / Services

U.S 13:30 Gross Domestic Product (Advanced Q1)

U.S 19:15 FOMC Interest Rate Announcement

written by Adam Solomon

GBPEUR/GBPUSD

Following on from last week, the Pound found support around $1.4450 against the Dollar on Thursday, while the UK currency also lost ground against the majority of the 16-most actively traded currencies. Investors flocked to the security of safe haven assets like the Japanese Yen and Swiss Franc, after Moody’s Investors Service said that the nation’s finances are “deteriorating rapidly” and the economy shrank by the most since 1979.

The degree of risk aversion sweeping through the market saw the Yen rally to a three week high against the Dollar, as Asian stocks fell and U.S equity futures headed lower. Adam Cole, head of global foreign-exchange strategy at RBC Capital Markets in London, said that “weak data and concerns about budget conditions leading to ratings downgrades are putting pressure on the Pound.”

The Pound rebounded from the 38.2% retracement level at $1.4450, to a high of $1.4722 in New York. However the UK currency has continued the downside momentum against the Euro, falling to a low of 1.1023 during the Asian session. The Nikkei 225 stock average fell 1.6% over night, amid speculation that the global recession will continue to delay a recovery in the world economy.

The Chancellor of the Exchequer Alistair Darling delivered his annual budget last Wednesday and the Pound declined following the statement, which seemed to indicate an overly optimistic view that the economy would recover at the end of the year. The UK government’s balance sheet is worsening due to weakening tax revenues and the effect of its bank bailouts.

Moody’s and Standard & Poor’s are currently reviewing the UK’s AAA sovereign credit rating, after the government said that the nation’s debt will reach £1.4 trillion over the next five years. An article in the Daily Telegraph said that Moody’s analysts are scrutinising the details of the budget and said that the Treasury’s projections are “a cause for concern.”

Sean Callow, senior currency strategist at Westpac Banking Corp said that “its a veiled threat from Moody’s. Given that we are still above where we were 24-hours ago you would hardly be shocked if the Pound headed back to the low 1.45s against the Dollar.”

The tone of the article is weighing on the Pound, particularly against the Euro, as the financial turmoil fueled borrowing costs and swelled the budget deficit to a record level. The UK currency is under considerable pressure against the single currency and may fall below 1.1000 over the coming weeks. The Pound depreciated 1.1% against the Euro on Friday, after touching the weakest level since April 9th.

The UK economy shrank 1.9% in the first quarter, the biggest contraction since Margaret Thatcher came to power in 1979. Gross domestic product fell 1.6% in the previous three months, indicating that the recession is showing few signs of abating, after manufacturing and service industries recorded sharp declines.

The economic slump may turn out to be the worst recession since the 1930s, prompting the government to say last week that the budget deficit could swell to a record level, casting doubt on the nation’s credit rating. The Bank of England argues that the slump in the economy may be easing, as they print money to stave off the threat of deflation and keep interest rates at a record low.

The Pound lost 26% versus the Dollar and 12% against the Euro over the past year and the weekly dollar-pound exchange rate has averaged about $1.67 over the past 20-years. That’s 14% higher than the current price, leading some analysts to conclude Sterling is undervalued.

Roddy Macpherson, an investment director at Scottish Widows Investment Partnership Ltd, said “we think the Pound will be the strongest currency over the next 12-months. The recovery of the UK economy will take place in the first half of next year, and the central bank will start to tighten” monetary policy.

In terms of economic data, the Pound may find some respite this week, following the negative market reaction to Darling’s budget and plans to dramatically increase public sector borrowing. The CBI distributive trades survey for April, along with consumer confidence data and manufacturing reports for the same month are all expected to show a modest improvement.

EUR/USD

The U.S Dollar and Japanese Yen have gained ground against the majors over the weekend, as concerns returned to global financial markets, regarding the spread of swine flu that has already killed 103 people in Mexico. Stocks declined around the world, Treasuries gains and safe haven currencies benefited, as the swine flu outbreak also spread to the U.S and Canada.

The U.S government declared a “public health emergency of international concern” that could potentially become a global outbreak of serious disease. The Dollar gained almost 1% against the Pound and the Euro overnight, as concern about the global epidemic became more intense. The subsequent degree of risk aversion also saw risk sensitive currencies like the Australian and New Zealand Dollar decline, with further selling pressure anticipated throughout the course of the day.

Concerns over a global pandemic will continue to overshadow markets for the time being, with the safe haven currencies benefiting the most. In terms of economic data, the focus this week will fall on the advanced estimates of U.S gross domestic product in the first quarter. The report is expected to show that the economy is contracting at an annual rate of 5%.

Elsewhere, the Federal Reserve’s Open Market Committee are set to convene this week and with interest rates already at ultra low levels, its thoughts will be on the U.S economy. There is also plenty of market moving data in the Euro-zone, with a host of key data due for release. The EC activity indices are expected to remain at depressed levels, while the flash estimate of consumer prices may show that inflationary pressures have subsided.

Data Released 27th April

U.K 00:01 Hometrack House Prices (April)

written by Adam Solomon

GBPEUR/GBPUSD

The Pound found support around $1.4450 against the Dollar yesterday, while the UK currency also lost ground against the Japanese Yen. Investors flocked to the security of safe haven assets, after Moody’s Investors Service said that the nation’s finances are “deteriorating rapidly” and the government are taking “risks.”

The degree of risk aversion sweeping through the market saw the Yen rally to a three week high against the Dollar, as Asian stocks fell and U.S equity futures headed lower. Sean Callow, senior currency strategist at Westpac Banking Corp said that “its a veiled threat from Moody’s. Given that we are still above where we were 24-hours ago you would hardly be shocked if the Pound headed back to the low 1.45s against the Dollar.”

The Pound rebounded from the 38.2% retracement level at $1.4450, to a high of $1.4722 in New York yesterday. However the UK currency has continued the downside momentum against the Euro, falling to a low of 1.1023 during the Asian session. The Nokkei 225 stock average fell 1.6% over night, amid speculation that the global recession will continue to delay a recovery in the world economy.

The Chancellor of the Exchequer Alistair Darling delivered his annual budget on Wednesday and the Pound declined following the statement, which seemed to indicate an overly optimistic view that the economy would recover at the end of the year. The UK government’s balance sheet is worsening due to weakening tax revenues and the effect of its bank bailouts.

Moody’s and Standard & Poor’s are currently reviewing the UK’s AAA sovereign credit rating, after the government said that the nation’s debt will reach £1.4 trillion over the next five years. An article in the Daily Telegraph said that Moody’s analysts are scrutinising the details of the budget and said that the Treasury’s projections are ” a cause for concern.”

The tone of the article is weighing on the Pound, particularly against the Euro, as the financial turmoil fueled borrowing costs and swelled the budget deficit to a record level. The UK currency is under considerable pressure against the single currency and may fall below 1.1000 over the coming weeks.

The UK economy has contracted more than economists forecast in the first quarter, the most since Margaret Thatcher came to power in 1979. Gross domestic product fell 1.9% from the final three months of 2008, as manufacturing and business services recorded record declines.

The report from the Official of National Statistics has poured scorn on speculation that the recession is abating, as UK business services shrank 1.8%, the most since the series was compiled in 1983. Manufacturing also contracted 6.2%, the most since at least 1948.

The government this week said that the steepest recession since the Second World War will push the budget deficit to a record level but the Bank of England have argued that the recession may be easing, as they print money to ward off the threat of deflation.

The UK is the first of the Group of Seven nations to report first quarter GDP, as finance ministers prepare to meet in Washington today, to discuss unemployment, deflation and toxic bank assets. The is the first time gross domestic product has contracted by more than 1% for two consecutive quarters, since modern records began after the Second World War.

EUR/USD

The Euro extended this week’s advance against the Dollar, rising back above $1.3200 last night, after a report showed that business confidence in Germany rebounded in April, from the lowest level in 26-years. The optimistic tone of the report has increased speculation that the worst of Europe’s economic slump may be over.

The Ifo Institute in Munich said that it’s business climate index increased to a reading of 83.7, from 82.2 in March. The result was way in excess of initial forecasts and the recent tone of economic data has raised hopes that the Euro-zone recession is waning. The Euro also made gains yesterday, after Credit Suisse Group AG said that it returned profit in the first quarter, while an index of European services and factory industries shrank at the slowest pace in six months.

The Dollar declined against the majors on Thursday, as the tone of U.S economic data was slightly weaker. Initial jobless claims increased 640,000 in the past week, from a revised 613,000 previously. The report dampened hopes that the labour market had improved, while existing home sales slowed to an annual rate of 4.57 million in March, from 4.71 the previous month.

Data Released 23rd April

GER 09:00 Ifo Index (April)

U.K 09:30 Gross Domestic Product (Q1 Prelim)

U.K 09:30 Retail Sales (March)

U.S 13:30 Durable Goods (March)

written by Adam Solomon

The Pound declined heavily against the majors yesterday, falling through a number of key support levels to a low of $1.4399 against the Dollar, ahead of UK economic data releases and the budget presentation. The UK currency also registered sharp losses versus the Euro, falling to a low of 1.1120, after the Treasury said that it will sell a record amount of gilts this year, in a effort to lift the economy out of the worst recession since the Second World War.

The London-based Debt Management Office said it plans to raise £220 billion from gilt sales in the year through March 2010, significantly higher than the £180 billion expected. The Pound also lost ground against the Yen and Swiss Franc, as the announcement encouraged investors to sell out of high-yielding currencies and seek the security of safe havens.

The Chancellor of the Exchequer Alistair Darling presented his annual budget to Parliament yesterday and predicted that the UK economy will contract 3.5% this year. Darling announced a larger-than-expected budget deficit of £175 billion for the fiscal year starting in April with only a marginal decline the following year.

In the aftermath of Darling’s growth forecasts, the International Monetary Fund predicted that the UK economy will contract 4.1% this year, with the recession continuing in 2010. According to a separate report from Citigroup Inc, this year’s shortfall of 12.4% of GDP will be the biggest peacetime deficit in more than a century.

Darling said that the recession will be the worst since the Second World War. The Treasury will borrow £269 billion, more than estimated in November, and will raise taxes by £3.2 billion on people earning above £100,000 a year. Tax increases were also announced for the following year to help trim the deficit, raising a further £6 billion through duties on alcohol, tobacco and fuel.

People earning in excess of £150,000 a year will pay 50% of their income in tax and lose tax breaks for pension contributions. The new rate is five points higher than anticipated in November and will unravel Margaret Thatcher’s Conservative budget in 1988, which eliminated all tax rates over 40%. The UK financial services industry will probably lose 140,000 jobs this year, while 25,000 of the richest taxpayers may flee the country.

Borrowing at this level would represent 12% of UK gross domestic product and this is on the basis that the economy will begin to stabilise before the end of the year, which is more optimistic that private forecasts from the International Monetary Fund. In addition, borrowing at these levels gives the government little room to stimulate the economy before the next General Election in 2010 and remains a very important risk factor for Sterling.

The announcement yesterday triggered a sharp decline in the Pound and the deficit is certainly at a level that could spell a sustained downward pressure on the UK currency. Darling’s expectations that growth will resume at the end of the year is far too optimistic and suggests that taxes will ultimately rise again.

Paul Day, chief market analyst at MIG Investments SA in Singapore, said the “the UK is mortgaged up to the hilt. Sterling is way off its lows against many currencies…the risk is that we’ll take those lows out over the next couple of months.” Therefore, Euro and Dollar buyers may wish to take advantage of the current rate, as the downside pressures surrounding the Pound continue to pile up.

The UK currency slid earlier in the day after a separate report from the International Labour Organisation showed that the number of people out of work rose to 2.1 million in the last quarter, the most in 12-years. The unemployment rate increased to 6.7%, the highest since October 1997, from 6.5% in the quarter through January.

The report from the Office of National Statistics showed that claims for jobless benefits rose 73,700 in March to 1.46 million, which was significantly less than the 116,000 anticipated. Darling pledged help for the unemployed in the budget yesterday, as the recession forced companies to cut production and axe jobs.

EUR/USD

The Euro declined to lows below $1.2900 against the Dollar yesterday, but the U.S currency was unable take full advantage and failed to challenge significant technical levels. U.S stocks rallied, diminishing the allure of the Dollar as a haven, while house prices rose 0.7% in February to record the first consecutive gain in the U.S for two years.

The report provides some optimism that near-zero interest rates may be moderating the decline in property values. Prices fell 6.5% in February from a year earlier, the second smallest drop in six months. Mortgage rates have tumbled 1.6 percentage points in the past six months, making homes more affordable.

The tentative swings in risk sentiment are likely to continue in the short-term, as fears over non-performing loans in the consumer credit sector will see traders maintain a generally cautious attitude towards risk, curbing any prolonged Dollar selling. The focus today in terms of economic data will fall on the U.S jobless claims. Confidence in the prospects of an economy recovery will be sustained if there is a further decline in jobless claims and a rise in existing home sales.

GBP/USD GBP/EUR

Data Released 23rd April

U.K 11:00 CBI Industrial Orders (April)

EU 08:58 Flash PMI – Composite

– Manufacturing

– Services

EU 09:00 Current Account (February)

EU 10:00 Industrial Orders (February)

U.S 13:30 Initial Jobless Claims (w/e 18th April 2009)

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

written by Adam Solomon

GBP/USD GBP/EUR

The Pound found some support below $1.4500 against the Dollar, rebounding from its lowest level in three weeks, while the UK currency also rallied back towards 1.1300 versus the Euro. UK stocks continued to slide, led by declines in banking shares, but quarterly results from Tesco Plc and Burberry Group Plc increased speculation that the economic slump may be easing.

The benchmark FTSE 100 Index lost just 0.1% to 3,987.46 in London, after earlier falling as much as 2.4%, following reports that earnings from Bank of New York Mellon Corp sparked a sell off in banks, offsetting a rally in consumer-related companies. Shares in Barclays Plc and Lloyds Banking Group Plc both retreated after the report.

The FTSE 100 has gained 14% from its lowest point this year, amid increasing optimism that the worst of the recession may be over. Almost $1.3 trillion in banking losses worldwide since the start of 2007 has dragged the UK benchmark index down 48%.

The correlation between the performance of the Pound and the volatility in equity markets has become increasingly prevalent over the past year. Since hitting a high of $1.5068 against the Dollar last week, the Pound has fallen to a low of $1.4472, as a degree of risk aversion crept back in to the market and encouraged investors to seek the security of U.S denominated assets.

The Pound swung between gains and losses against the Euro yesterday, after a report from the Office of National Statistics showed that UK consumer price inflation dropped to the lowest level in a year. The worst recession in a generation has blunted price pressures across the economy, as consumer prices rose just 2.9% from a year earlier

The result matched the median forecast but the retail price index annual gauge dropped for the first time since 1960. Energy costs have plummeted and retailers have reported slower sales, as Tesco Plc, Europe’s second largest retailer, said yesterday that profit growth was the slowest in 15-years. Price cutting by rival companies has eroded their market share, as consumers cut back on spending, amid fears over job security.

George Buckley, chief UK economist at Deutsche Bank AG in London, said yesterday that “we are going to get below 1% inflation by September”, which may undermine confidence in the economy in the second half of the year and stoke deflationary concerns. The Bank of England forecasts that inflation will slow to 0.3% by 2011, well below the government’s 2% target, and a recent report showed that UK producer prices rose at the slowest annual pace in March for almost two years.

The Governor of the Bank of England Mervyn King wrote a letter of explanation to the Chancellor, as to why inflation had breached the 3% upper limit in February and said that a “sharp decline” in the rate is likely to resume. Although it may remain “volatile” because of the weakness in Sterling, which makes imports more expensive.

The retail price index measure of the report showed a 0.4% annual price drop in March to record the first annual decline in nearly half a century. The Bank of England have cut interest rates to a record low of 0.5% and embarked on a policy of quantitative easing, through the purchase of government bonds with newly created money.

The Confederation of British Industry predicted earlier this week that the UK economy will contract 3.9% this year, curbing tax revenue and pushing the budget deficit to 11.2% of gross domestic product. The Chancellor Alistair Darling will deliver his budget statement at midday today and is expected to refrain from announcing any additional fiscal stimulus measures.

Darling is expected to spell out plans to rein in the UK fiscal deficit, outlining measures to improve government efficiency and slow government spending. The cost-cutting will form part of a broader effort to rebuild credibility in the handling of the economy and boost Labour support in the polls.

The budget will also offer short-term relief to the unemployed and provide incentives to spur new industries. The government is seeking to fend off criticism of economic mismanagement from economists and opposition leaders, after injecting hundreds of billions of Pounds to shore up the banking sector.

The budget deficit will be £160 billion in the fiscal year ending in March 2010 and a projected £167,000 billion the following year, according to a median of estimates carried out by the Treasury. That’s significantly higher than the £118 billion that Darling predicted in December and economists have urged the Chancellor to hold back on any new fiscal support, giving more time for previous measures to work.

In terms of economic data, the Pound may come under further selling pressure this morning, as UK unemployment data may show that jobless benefits claims jumped to the highest level since 1997. Claims probably increased to 116,000 in March, while the Pound may also be susceptible to the tone of the minutes from the Bank of England’s last policy meeting.

There were mixed comments from MPC member Fisher yesterday, who indicated that policy makers would need to discuss whether the quantitative easing program would need to be expanded. Any move to increase the rate of bond purchases would tend to undermine Sterling.

EUR/USD

The Euro found some support below $1.2900 against the Dollar on Tuesday and attempted a rally during the day. German investor confidence rose to the highest level in almost two years in April, after global stocks rallied on government and Central Bank efforts to revive economic growth. The ZEW Centre for European Economic Research said that its index of investor and analyst expectations rose to the highest level since June 2007 and recorded the first positive reading since July of that year.

European stocks last week posted their sixth consecutive weekly advance, amid speculation that the worst of the recession may be over. The German Chancellor Angela Merkel’s coalition government will spend about €80 billion to the stem the country’s worst recession in over sixty years and the ECB has signaled that it will cut interest rates to a new record low in May.

The Dollar declined against almost all of the 16-most actively traded currencies yesterday, after the Treasury Secretary Timothy Geithner said that the “vast majority” of U.S banks have sufficient capital. His comments reduced the allure of the Dollar as a safe haven and the U.S currency declined more than 1% against the higher-yielding currencies.

Data Released 22nd April

U.K 09:30 BoE Minutes of 8/9th Meeting

U.K 09:30 Average Earnings (3 Mths to February)

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

U.K 09:30 PSNCR (March)

written by Adam Solomon

GBP/USD GBP/EUR

The Pound was unable to make any headway during Asian trading on Monday and slumped to the lowest level in six weeks against the U.S Dollar. The UK currency also suffered a sharp intraday loss against a basket of currencies, as banking shares tumbled and a report from the Confederation of British Industry predicted that the economy will contract by more than initially anticipated.

The Chancellor of the Exchequer Alistair Darling has been advised to hold back on any further fiscal support to the economy and allow time for the current measures to take effect. Government debt has also increased exponentially and the report from the CBI forecasted that the UK economy will shrink by 3.9% this year.

The extent of the economic slump will exacerbate the Treasury’s deficit, curb tax revenue and push the deficit to 11.2% of gross domestic product. That may limit the amount of new spending that Darling can announce in the annual budget statement on Wednesday, which the government hopes will bolster the economy and increase support ahead of the election due by the middle of 2010.

The accompanying statement from the CBI Director General Richard Lambert said that “given falling tax revenues, the shrinking economy and alarming levels of debt, we urge the chancellor to avoid any further major fiscal boosts.” The suggestions from the business lobby contrast with the view of union representatives, who want the government to spend more on bailing out struggling automakers like General Motors Corp.

The political pressures surrounding the tone of the budget statement will be significant, as Darling must appeal to the electorate and convey a plan to boost the labour market. The unemployment rate has risen to the highest level since 1971, as companies cut output and shed workforces. A separate report from the Centre for Economics and Business Research said yesterday that fewer jobs will be lost in the financial services industry than previously estimated.

Roughly 29,000 jobs will be eliminated, compared with an October estimate of 34,000, while 28,000 lost their pensions last year. Nevertheless, the CBI and the CEBR both agree that the worst of the recession may be over, after a gauge of UK service sector growth rose to a six month high in March. In addition, a report from the Bank of England showed that mortgage approvals rose in February, while house prices increased for the first time since 2007.

The Pound was unable to sustain the recent upside momentum against the Euro yesterday, falling towards 1.1220 last night, despite a report from Rightmove Plc, which showed that asking prices for homes rose for a third month in April. Mortgage availability improved as banks revived lending, after the government injected hundreds of billions of pounds of support to banks, including Lloyds Plc and Royal Bank of Scotland Group Plc.

The Bank of England have cut interest rates to a record low of 0.5% and embarked on a program of creating new money to purchase government and corporate bonds in a policy known as quantitative easing. The aggressive policy easing from the BoE has put the UK ahead of the curve in terms of an economy recovery and that has seen the Pound rally to a high of 1.1368 versus the Euro.

The Pound also registered losses against the Japanese Yen and Swiss Franc, as an element of risk aversion crept back into the market, after the FTSE 350 Banks Index dropped 5.3% in London. UK stocks also slipped 2.5% yesterday, falling below the 4,000 barrier, amid speculation that the economy is still in the midst of the worst recession since 1980.

The Pound slipped to a low of $1.4501, to record the biggest daily decline since March 9th and the lowest level since April 2nd. The aggressive swings in risk sentiment and fiscal policy uncertainties will continue to be the dominant feature this week. The annual budget tomorrow is expected to have a tough tone on government spending, while trends in the global banking sector will be watched closely.

Ongoing fears surrounding the U.S sector will undermine confidence in the Pound and the degree of risk appetite will also remain very important in driving sentiment. The UK currency may find some support just under the $1.4500 level versus the Dollar and has already staged a partial correction this morning, following the sharp losses on Monday.

EUR/USD

The Dollar rallied to close to a five-week high against the Euro yesterday, amid concerns that the global financial crisis will worsen and boosted the demand for the U.S currency as a safe haven. The tentative sentiment surrounding the prospects of an economy recovery continues to drive the market and the Dollar may continue to make gains in the short-term, breaching the $1.3000 level.

The Japanese Yen also strengthened against 15 out of the 16 most actively traded currencies, as the slump in Asian stocks prompted investors to reduce holding of higher-yielding assets. Yuji Saito, head of foreign-exchange group in Tokyo at Societe Generale SA said that “renewed worries over the financial turmoil are making investors risk averse again. In this environment, the dollar and the Yen are likely to be bought as ’safe haven’ currencies”.

The Euro also came under further selling pressure, after the ECB chairman Jean-Claude Trichet signaled that the governing council will cut interest rates further from the current 1.25% and may pump money into the economy in a less conventional policy measure. Overall confidence in the Euro-zone economy also remained weaker, which curbed support for the single currency.

Data Released 21st April

U.K 09:30 Consumer Price Index (March)

– Retail Price Index

GER 10:00 ZEW Index (April)

written by Adam Solomon