DAILY REPORT WEDNESDAY 23^RD APRIL 2008

Good Morning,

The fallout from the Bank of England's decision to swap £50 billion worth of UK government bonds for mortgage securities was greeted with cynicism from the market as the Pound at first, plunged against both the Euro and the Dollar amid suggestions that the Central Bank is following in the Fed's footsteps. The Bank of England has endured a barrage of criticism over their handling of the credit crunch with the Bank reluctant to enter an environment where banks and lenders would start relying on emergency funding to get them out of financial difficulty.

However, by midday the Pound had recouped those losses and began to make significant gains against the majors, rising above the resistance at 1.9896 versus the Dollar to close just under the $2.00 and at 1.2480 levels against the Euro. The sharp intraday volatility surrounding the Pound can be attributed to news that the Finance Minister Alistair Darling was set to meet key mortgage lenders and the focus today will inevitably fall on the release of the minutes from the Bank of England's last policy meeting. The MPC are expected to have voted unanimously to cut interest rates in April but a split decision will obviously revive Sterling sentiment as the probability of a back to back rate cut in May will all but diminish.

The Euro surpassed the $1.6000 barrier versus the Dollar for the first time ever yesterday and further gains are likely in the near-term as ECB governing council member, Christian Noyer, reiterated concerns over consumer prices and insisted that the Central Bank must restrain inflation. The harmonised index of European consumer prices showed that European inflation had risen to 3.6% year-on-year in March while the overwhelming increase in commodity prices combined with rising wage demands will force the ECB to retain a tightening bias in the months ahead.

Despite the fundamental lack of European economic data this week, the Euro will probably consolidate above the $1.6000 level and continue to make gains against the Pound as the diverging interest rate expectations between Europe and the UK become increasingly wider.

The Dollar declined yesterday, after existing home sales fell in March while tighter lending restrictions deterred buyers. The housing slump has raged on for three years now as defaults on subprime mortgage loans led to tighter borrowing conditions while falling property and rising foreclosures sends the economy hurtling towards a recession. The downturn in consumer confidence is also hurting the economic outlook and with oil prices hitting a record high of $119 a barrel yesterday, the Fed have little choice but lower interest rates by a further 25 basis points and ignore the risks to inflation. 

Michael Ince

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