MARKET REPORT THURSDAY 27TH MARCH 2008

Good Morning,

The brief resurgence in Sterling sentiment came to a halt in early trade yesterday as Bank of England governor Mervyn King addressed the UK Treasury Select Committee and gave a strong indication of a UK rate cut in April. The Pound had risen to 2.0100 levels on Tuesday but King’s comments saw Sterling relinquish any of the day’s previous gains against the Dollar while dropping towards a record low versus the Euro.

In the aftermath of the statement, the Pound plunged below 1.2700 versus the Euro as the market began pricing in a further quarter point reduction and further downside movement may be likely as the we build up to April MPC announcement.  

Despite the fundamental lack of European economic data this week, the Euro has taken advantage of broad dollar weakness to stand within a cent of the record high above 1.5900 against the ailing U.S currency. The Euro has also made strong gains versus the Pound as the German  business sentiment index rose for a third month in March. The Munich-based survey indicated that the momentum surrounding Europe ’s largest economy is offsetting the unrelenting rise in commodity prices and the threat of a U.S led recession. The German economy expanded last year at the fastest pace since 2000 while the jobless rate fell a near record low. Record high food and energy costs have pushed up consumer prices and the ECB is still far more concerned with the threat of inflation than the impact of a strong euro. That sentiment was echoed yesterday by the Central Bank President, Jean-Claude Trichet, who fiercely rejected calls for an interest rate cut and insisted that the current stance was necessary in order to achieve their price stability objective.

The negative sentiment surrounding the economy continued to hamper Dollar sentiment yesterday as the U.S currency declined 1.3% against the Euro following reports that orders for U.S durable goods unexpectedly fell in February. A slump in overseas and domestic demand for machinery saw orders drop 1.7%, following a 4.7% decrease the previous month, and the slump in demand indicates that companies are hesitant to expand amid fears of a U.S recession. Elsewhere, towards the close of the European session, the Dollar also declined against the Pound as a separate report on the housing market showed that sales of new homes fell to the lowest level in 13-years. Sales dropped 1.8% from the previous month and the unrelenting slump in the property market shows few signs of abating as tighter loan restrictions and the prospect of even lower prices kept buyers at bay.

Michael Ince

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