MORNING REPORT THURSDAY 3 RD APRIL 2008 

Good Morning,

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

The fundamental lack of economic indicators released this week saw the Pound move to fresh record lows against the Euro but the UK currency recovered some of those gains yesterday as a surprisingly positive report on manufacturing dimmed the prospect of a 25 basis point cut next week.

Factory output accelerated well beyond initial expectations in March as the Pound's weakness against the Euro made UK exports far more attractive and offset a slowdown in U.S demand. A separate gauge of the report also showed that producer prices rose to the highest level in nine years, indicating that manufacturers are passing on higher costs to the consumer and feeding through to inflation. Consumer prices remain well above the Bank of England's 2.0% target and the MPC may be more cautious than the market anticipates with an April rate cut still not a done deal. 

Nevertheless, the deteriorating outlook for the UK economy was further emphasised in a report from Hometrack Ltd , who reported that UK house prices fell for a six straight month in March. The average cost of a home in Britain declined 0.2% last month as banks imposed tighter lending restrictions and consumers lost confidence following the Northern Rock debacle.

The Euro's dramatic appreciation in value has caused concern among ECB policy makers but the single currency declined significantly against a resurgent Dollar yesterday as German retail sales came in much weaker than expected. Consumer spending in Europe 's largest economy fell by the most in over a year as rising food and energy costs undermine confidence.  Nevertheless, a separate report from the Federal Labor Agency showed that unemployment in the region fell to the lowest level since August 1992 with the jobless rate falling to 7.8% this month. The upward swing in the German labour market is likely to support economic growth this year as a strong Euro weighs on exports and the ongoing financial crisis spreads to Europe . 

The dramatic decline in Dollar sentiment has seen the Dollar plummet against most of the 16 most actively traded currencies but yesterday the U.S currency found some support, rising by the most in 2 weeks versus the Euro.  The U.S currency also rose for a second day against the Pound as news broke that UBS AG will raise in the region of $15 billion, signaling that the world's biggest financial institutions will whether the storm in credit markets.  

The U.S Dollar has completed its worst quarterly performance in four years against the Euro as the Federal Reserve proceeded to cut interest rates by 2.0% since the turn of the year in a vain attempt to revive economic growth. In terms of economic data, the Dollar also found support as the ISM manufacturing index showed that output contracted less than expected this month. The report from the Commerce Department eased concerns that slowing consumer spending and business investment will cause a deeper economic slump.

Michael Ince
Senior Trader
First Rate FX

Archive News

This commentary is generic and may not suit all circumstances. Before taking any action, we recommend either contacting your trader for guidance or obtaining independent financial advice. The information in this document was obtained from sources believed to be reliable but its accuracy and completeness cannot be guaranteed. The views and recommendations in this communication are typically short term trading views. Comments constitute views at the time of writing and are subject to change without notice. The rates shown are all indications. For specific quotations, please contact your usual trader. This document is not intended as an offer, solicitation or recommendation to buy or sell.