DAILY REPORT TUESDAY 6TH MAY 2008

Good Morning,

Last week the Pound gained in momentum against the Euro, breaching the 1.2800 barrier on Friday but opened lower this morning trading down to the 1.27 00 level. The recent economic figures support the view that the UK economy is still in trouble and the latest housing numbers showed that prices have posted the first annual decline since1996, while construction contracted to the lowest level in a decade.

It is expected that the 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 against the Euro since February.  

The tentative price action surrounding Dollar has seen the Pound struggle to stay above 1.9900 against a resurgent U.S Dollar and this morning it has opened below 1.97 levels, 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 by Friday the Euro had declined to the lowest since February trading down to the 1.54 level. 

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 US economy has seen the Dollar extend its recent run against the Euro and Sterling in recent days. 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 prompt the Federal Reserve to keep interest rates unchanged in May.

Michael Ince

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