MARKET REPORT WEDNESDAY 9TH APRIL 2008

Good Morning,

Sterling fell to a new record low of 1.25 against the Euro as weak housing market and consumer confidence data reinforced market expectations for a Bank of England interest rate cut on Thursday. The pound extended losses after Halifax, the UK’s largest mortgage lender, said yesterday that house prices fell 2.5% m/m in March, the sharpest monthly decline since September 1992. This data means that the MPC’s preferred measure of house price inflation has given its weakest reading since August 1995. Recent evidence of the decline of credit availability in the residential mortgage market suggests there remains significant downside risk to house prices in the UK . The weak reading has increased the chance of a 25bp cut by the MPC on Thursday and put further downward pressure on sterling.

This morning Finance Minister Alistair Darling said that the underlying UK economy was strong despite the data, but added that more could be done to reopen the mortgage market. Yesterday it was announced that Abbey has become the last of the major UK high street lenders to withdraw 100% mortgages from the market, effectively locking out first time buyers without a sizeable deposit.

The minutes of the last Federal Reserve meeting, released last night, highlighted the Committee’s views towards the downside growth risks despite a notable marking up of inflation forecast - heightening market expectations for further US rate cuts. Economists anticipate the FOMC will cut by 50bp at their next meeting at the end of April, before holding at 1.75% for the rest of 2008. By contrast, the euro was supported against Sterling and the Dollar by market expectations for the ECB to keep interest rates on hold for the near term. The news saw the Dollar edge lower against the Euro as the yield appeal tilted further in the Euro’s favour. Reluctance by investors to buy the Euro aggressively ahead of central bank meetings tomorrow put a cap on the Dollar’s decline however.

The market will be looking to UK output data for February, due for release this morning, as this will provide one of the last snapshots of the health of the economy ahead of the BoE decision tomorrow.

Michael Ince
Senior Trader
First Rate FX

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