The Pound suffered yesterday as the PMI Services data came in weaker than expected, at a level just showing some expansion, with the details of the report showing confidence within the Service sector the lowest since the 2001. The UK relies heavily on it's service industry for growth, so the decline is not good news, and with the Manufacturing PMI hovering around the same level, it looks like the credit crunch and housing slowdown is starting to bleed into the broader economy. Whether this will change the MPC's decision on Thursday is another matter; many thought that the MPC would cut by 25bp anyway, and a few of those who thought the decision would be to keep rates on hold have now started to waver. If the BoE do not cut rates in May then it would make a decision to cut rates in June very likely, and the Pound has fallen on the back of this down towards 1.96 against the US Dollar, and below 1.27 against the Euro.
The Pound's fall against the Dollar is in spite of the American currencies own problems. There was mixed news from the stock markets as Fannie Mae, one of two megalithic mortgage companies, reported over $2bn quarterly loss and announced they were trying to raise $6bn in capital, although surprisingly their stocks rose as their executives also said that they thought the worst of the credit crunch was behind them. It is a sign of the pessimism in the US housing market that the strange pattern was mirrored by the largest US home builder, who also announced a quarterly loss, and yet their stock rose 5.5%.
The Dollar also came under pressure from a rise in Oil prices. As Oil is traded exclusively in Dollars, the value of the Dollar has a strong correlation to the price of Oil, but the relationship is reciprocal and as the price of Oil rises, it hit a new record high of $122 per barrel, it puts downward pressure on the dollar. The Euro has started to rise again against the Dollar, and got up towards 1.56 overnight before falling back this morning.
Ahead of tomorrow's MPC decision we have Q1 Industrial production figures, and the BRC shop price index. Continuing the trend the Manufacturing figures are likely to be on the weak side, and the BRC index will give some idea of consumer price pressures ahead of next weeks official CPI release. Neither report is likely to sway the MPC, who start their meeting today, so it is likely to Pound will continue to be on the back foot until tomorrows decision.
We have retail sales for the Eurozone, likely to show a small bounce from last months figures, and yet more weak house and consumer credit figures from the US. With the ECB meeting tomorrow, and expected to keep rates on hold, it would take a shocking figure from the retail numbers to sway the markets one way or the other.
Michael Corcoran - Assistant Manager |Treasury Solutions | nabCapital™ | A division of National Australia Bank Limited