MARKET REPORT THURSDAY 10^TH APRIL 2008

Good Morning,

The pound continued its decline against the Euro, falling below 1.25 yesterday and trading @ 1.2470 levels this morning, as the market focuses on interest rate differentials ahead of policy meetings today.

The Dollar also fell against the Euro yesterday trading above1.5900 level as investors reacted to the Fed comments pointing to continued US economic weakness with expectations for further acknowledgement of upside risks to inflation by the ECB. A rise in oil prices to a record

high yesterday and falling stock markets also weighed on the Dollar.

The Bank of England announces its latest rate decision at noon today with the MPC expected to cut rates by 25bps. UK economic data, while being mixed, have on balance weakened though the strongest arguments for a cut come from the housing and credit sectors. The Halifax house price data clearly showed that the housing market is deteriorating and recent credit market data shows an unambiguous tightening in credit conditions. Economists do not envisage that a 50bp cut will materialize, as inflation remains high and a weaker sterling will only add to inflationary pressures down the line. The UK mortgage market is clearly bearing the brunt of credit tightening at present. A rate cut by the MPC today would help to offset the hit to demand from weaker property markets and consumer confidence that reduced credit availability is likely to bring.

The market is expecting that the ECB will leave rates on hold at 4.00% this afternoon and will likely note that while downside risks to activity exist, upside risks to inflation are more significant.  Economists expect the ECB to begin easing policy only at its September meeting.

Michael Ince
Senior Trader
First Rate FX

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