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Fed Day, US$ Poised For Gains Should Fed Confirm End of Easing

The US$ gained modestly overnight across the board ahead of today’s announcement at 2:15 p.m. on interest rates by the US Federal Reserve. It is widely expected that the Fed will reduce rates 25 basis points later today, however, there is growing speculation that they will hold steady. (Futures markets currently reflect a 78.0 probability of a 25 basis point cut, with a 22.0% chance assigned to no cut). Regardless of the Fed’s action today, traders believe that the commentary following this meeting will signal that the US Central Bank has neared an end to its cycle of rate cutting. This has helped bolster the US$. Also helping the greenback to gain has been the recent drop in commodity prices. Both the price of oil and gold continue to decline, a further precursor to US$ strength as these commodities remain closely linked to the US$. However, with this euphoria about the Fed helping bolster the US$, economic releases continue to remain weak. Earlier this morning Mortgage Applications were released at a slighter better decline of 11.1% from a 14.2% drop last month. At 8:15 the ADP Job report is to be released expected to show that the US economy shed 60,000 jobs in April. This report is a good indicator of Friday’s non-farm payroll report. At 8:30 the first release of GDP for 2008 is to be released showing that the US economy gained a paltry 0.4%. The morning rounds out with the release of the Chicago PMI, expected to decline to a reading of 47.2. While the Fed will be ultimately the fate of the US$ today, this diverse range of economic releases could influence trade in the short-term.

The euro fell overnight as the market’s focus remains on the US Central Bank nearing and end to its rate cutting cycle. Despite diverging sets of news from the Eurozone concerning economic performance, interest rate differentials remains the primary focus of trade. Helping the euro early in trade was the release of a report showing that German unemployment fell 7,000 from March to 3.3 million. Economist has forecast a drop of 30,000. However, these gains were soon reversed after the European Commission released a report showing that both consumer and business confidence declined to the lowest levels in over two and half years. With market uncertainty beginning to surface about the Eurozone’s ability to remain isolated from the US economic slowdown, the euro could come under continued pressure. In the interim expect trade today to remain volatile ahead of the Fed’s afternoon rate decision.

The yen fell overnight following the decision by the Bank of Japan to hold rates steady at 0.5%, the lowest amongst the G7 economies. In addition, the BOJ scaled back its 2008 economic growth forecast, lowering expectations to 1.5% annual growth from a previous forecast of 2.1%. It seems that the Japanese economy is weakening with consumption, production and employment all declining. This slowdown could certainly prompt the BOJ to again reduce rates by the summer, further heightening the appeal of the “carry trade.” Traders will likely continue to use a short yen position to finance purchases of other asset classes for some time. This trend will almost certainly continue to weaken the yen.

The pound fell overnight after the release of a report showing a weakened housing market. The UK’s Nationwide Building Society released a report that showed that UK home prices fell on annual basis for the first time since 1996. This data reignites the discussion about the likelihood of the Bank of England cutting rates in the near-term. Expectations of lower UK rates will certainly continue to weigh on the sterling.

Fed Meeting Tomorrow; US$ Remains at Stronger Levels

The US$ gained across the board overnight following disappointing news from the Eurozone and UK, and ahead of the Fed’s policy decision tomorrow. Traders continue to speculate that the US Central Bank will signal that it has ended or is near an end to its cycle of rate cutting. Currently future markets have priced in an 84.0% probability that rates will be reduced 25 basis points to 2.00% tomorrow, with a 16.0% probability assigned to the likelihood of no rate reduction. Futures markets for the following Fed policy meetings show rates remaining steady at levels near 2.00%. This apparent end to the US rate easing cycle has led traders to gradually move positions back to the greenback as the yield advantage has again shifted in favor of the US currency. However, further US$ gains could be limited today as economic data releases steer trade. At 9:00a.m. the S&P/Schiller Home Price Index is to be released, expected to register a decline, revealing that the US housing sector still remains in a precarious position. In addition, at 10:00 a.m. Consumer confidence is to be released, expected to decline to a reading of 61.0. With weak US data remaining in the forefront, extensive US$ gains will likely be limited.

The euro fell overnight after the release of some disappointing data and news from throughout the Eurozone. A report released overnight showed that European retail sales dropped at the quickest pace in over four years, registering 41.8 in April from a 48.2 reading in March. Any reading below 50 is a sign of contraction. In addition to this weak data on the consumer front, there was some disappointing news from Eurozone corporate giants. Deutsche Bank AG, reported its first quarterly loss in over five years as it wrote down some $2.7 billion euro in loans used to finance LBOs and asset backed deals. In addition, BMW announced that its first quarter profits fell 17.0% as a slowing US economy hurt prices. With signs that the credit contagion and a slowing US economy are now being felt in the Eurozone, the common currency could be poised for further declines.

The yen fell modestly overnight as traders continue to use the currency as a barometer for market risk. With global equity markets seemingly recovering and traders now more willing to shift riskier positions to their balance sheets the “carry trade” has reemerged. Look for this trend to continue for some time as low Japanese interest rates will likely continue to promote borrowing in yen and exert downward pressure on the currency.

The pound extended its losses form yesterday following a report released overnight showing renewed weakness in the UK housing sector. Home Loans declined some 45.0% year on year as banks granted only 64,000 mortgages in April of 2008 vs. 115,000 in the same month of 2007. This data reveals that the credit contagion hitting UK banks earlier this year has directly affected their lending patterns to consumers. This data should put further pressure on the Bank of England to reduce rates, further reducing the appeal of sterling deposits and leading the pound to drop further.

Stage Set for Fed Meeting on Wednesday - US$ in Lower Ranges

The US$ fell modestly overnight against the euro and pound, while gaining against the yen as traders adjusted positions ahead of the Fed’s policy meeting on Wednesday and ahead of a wide range of US economic releases slated for this week. Traders are currently forecasting that the Fed reduces rates 25 basis points on April 30th, assigning an 82.0% probability to such an action. However, there is some speculation that the Fed could refrain from any action, with the market’s assigning an 18.0% chance to such a policy position. However, markets are forecasting that any such rate cut at this meeting will likely signal an end to the Fed’s rate cutting strategy as the US Central Bank focuses on moving to combating mounting inflation pressures. In addition to the Fed this week, traders will almost certainly be watching the flow of US economic data. While no data is slated for release today, tomorrow sees the release of the S&P Schiller Home Price index, expected to register a decline of 12.0%, in addition to Consumer Confidence. Wednesday sees the release of 1st quarter GDP expected to register a paltry gain of 0.4% and the ADP Employment report expected to show the economy lost 60,000 jobs in April. Thursday sees the release of Personal Income and Spending, as well as ISM Manufacturing and Construction Spending data. The week winds to a close with the release of Factory Orders and the all-important Non-Farm Payrolls report, expected to show a loss of some 35,000 jobs. Trade will likely remain light today with the Fed and this abundance of data all on the docket for this week.

The euro inched slightly higher overnight after the release of a report showing that German consumer confidence unexpectedly rose in March and continued hawkish commentary from ECB officials. German consumer confidence increased to a seven-year high as rising incomes encouraged household spending. The Index rose to a reading of 5.9 from 4.8 last month. Also helping push the euro higher was commentary from ECB Chief Trichet who signaled that high rates have helped achieve a “firm anchoring of medium to long term inflation expectations.” In addition, his colleague Klaus Liebscher stated the Bank has to “closely monitor” all developments and act preemptively if necessary to combat inflation from rising food and energy prices. This hawkish stance from the ECB will likely keep the currency underpinned for the early part of this week, until the market has an opportunity to parse commentary following the Fed’s policy meeting later this week, ultimately determining the direction of US interest rates and gauging the extent of any further yield advantages offered by the Eurozone.

The yen continues to weaken against the US$ as traders gradually reenter riskier positions using the yen to finance these trades. With Japanese interest rates remaining the lowest amongst the G7 nations, traders continue to short the yen amidst the “carry trade.” Further pushing the yen lower has been a two-day slump in Japanese government bond prices, showing that local investors are also seeking the higher yields offered abroad. Expect this trend of yen weakness to continue for some time.

Sterling continues to seesaw in ranges as divergent sets of economic releases paint an uncertain picture about the direction of UK interest rates. A report released overnight showed that UK house prices dropped at the quickest pace in almost three years. The average cost of a home in the UK fell 0.6% last month, helping to reignite speculation that the Bank of England could soon push rates lower. This uncertain rate outlook will certainly continue to relegate the pound to wide ranges.

IFO Might Be Watershed Event for US$ to Gain

The US$ rallied overnight following a drop in crude oil prices and as the belief that the rest of the G7 will soon suffer the same economic slowdown rattling the US gained footing in markets. Currently, the euro has been tightly correlated with the price of crude oil at close to a .97 coefficient, indicating that the two markets are moving very closely together. With the backing up of oil prices overnight the euro dropped. Also helping the US$ gain some footing overnight is the belief that the US Fed is nearing an end to its rate cutting cycle. Currently futures markets have priced an 88.0% probability that rates drop 25 basis points next week to 2.0%, while 12.0% of traders believe that rates will hold steady at 2.25%. These interest rate expectations are helping to bolster the US$, however, it will ultimately be the flow of US economic data which helps determine the extent of this US$ rally. At 8:30 a.m. Durable Goods were released at a better than expected gain of 1.5%, excluding transports, indicating that perhaps the economy is bottoming. At 10:00 New Home Sales are to be released, expected to decline to 580,000 in March. Should this data register a better than expected reading, it could help the US$ rally further.

The euro dropped overnight following the release of disappointing data from Germany and after comments from a member of the Maltese Central Bank. The German Ifo Survey was released overnight revealing that business confidence fell to the lowest levels in more than two years in April, indicating that the US slowdown could be spreading to the Eurozone. The Ifo Survey revealed that the confidence fell to 102.4 in April from 104.8 in March. In addition, a survey of French manufacturers revealed that confidence slid to a reading of 106 in April from 108 in March, indicating a further concern that this US economic slowdown could be spreading. Also helping the euro to decline were comments from ECB council member and chief of the Maltese Central Bank, Michael Bonello. Bonello stated “No Eurozone members want rates higher than 4.0%, and that it is very difficult to argue for higher interest rates.” These comments seem to indicate a backing away from the recent hawkish tone of the ECB, allowing the currency some room to fall. Expect this trend of euro weakness to continue throughout today.

The yen has come under modest pressure this morning as US$ strength against other currencies has helped propel the Japanese currency lower. With the apparent drop in crude prices overnight, equity markets seem poised to rally this morning, leading traders to again explore the option of using the low yielding yen through the “carry trade.” With this positive factors again moving into markets, traders seem willing to adopt additional risk, leading the yen lower as it remains the preferred vehicle to finance positions.

The pound dropped overnight as US$ strength pervades markets leading sterling lower. However, these losses will likely be tempered as better than expected retail sales data was released in the UK indicating that the consumer could be more viable than originally thought. Retail Sales registered a gain of 4.6% in March, higher than the 4.3% reading forecast. This data will likely limit the scope of further rate cuts from the Bank of England, helping keep sterling firm on a yield basis. Also helping limit sterling’s losses were comments from Bank of England policy maker Andrew Sentence, who stated that there is no reason the pound should fall “significantly” against the US$. With strong retail sales data limiting the scope of further BOE rate cuts, expect sterling losses to ultimately be limited against the US$.

US$ Strengthens Today, Countdown to Fed at 1 Week

The US$ gained overnight after trading to a record low against the euro yesterday, following comments from a prominent Eurozone finance minister that the US$’s continued decline is a cause for concern. As the G7 signaled two weeks ago that they remained concerned about excessive volatility in fx markets and are prepared to act, these comments echo these sentiments. Yesterday, the US released data pointing to a continually weak housing market, as existing home sales registered a sharp decline. This weakness in housing was reinforced this morning after the release MBA Mortagge applications pointing to a decline of 14.2% for the week ending April 18. With US economic weakness continuing to pervade the market, traders remain concerned about how deep seated any such economic slowdown will be and what the reaction from the US Central Bank will be when it meets next week. Market expectations continue to swirl around the scope of any action from the Fed when it meets on April 30th. Currently futures markets have priced in a 92.0% probability that rates drop 25 basis points, with an 8.0% chance that rates hold steady. Should the Fed refrain from such a rate cut, the US$ could get a boost from its recent lows. Trade will likely remain rangebound today, with traders focused on the wire to see if any additional commentary about the US$ emerges.

The euro fell from its all-time highs against the US$ overnight following comments from several Eurozone officials. Luxembourg’s Finance Minister Jean-Claude Juncker stated that he “did not like the way things were developing (in the fx markets).” In addition, France’s European Affairs Minister Jean Pierre Jouyet stated that the euro’s advance above 1.60 is worrying and he urged greater cooperation amongst the G7 to stem the greenback’s decline. Also helping the US$ gain was an apparent back-tracking from ECB Member Christina Noyer concerning his overtly hawkish tone on rates yesterday. Yesterday, Noyer asserted that policy markers will “do what it takes” to curb inflation. However, overnight he said his statements were misinterpreted and that rates could “go both ways.” However, the euro’s losses could ultimately be limited as a report released overnight showed that growth in Eurozone service industries unexpectedly accelerated in April. The euro will likely remain in ranges, with aggressive rhetoric capping the currency at levels near the all-time highs, however ultimate declines in the common currency will be contained by robust inflation readings.

The yen continues to trade in tight ranges as traders have appeared to settle into a “wait and see” mindset concerning their appetite for market risk. With equity markets in an apparent sideways trading pattern, traders remain unwilling to adopt additional risk in their portfolios. The result has been limited use of the “carry trade” both from a standpoint of initiating new transactions and squaring exiting positions. This trend will likely continue for some time forcing the yen to remain in current ranges.

The pound fell overnight after the release of a report revealing that mortgage approvals fell to the lowest levels in almost a decade in the UK. This data reinforces the view that a credit squeeze has overtaken UK lending practices, and seemingly will shift the BOE into a more dovish policy position. In addition, this data reaffirms the view that the BOE’s recent action to swap government securities for under performing mortgage-backed securities at many financial lenders was warranted. Expect sterling to remain under duress, as traders will continue to shift expectations for lower rates, ultimately weighing on the pound.

The Aussie surged overnight after the release of a report showing that consumer prices increased 4.2% in the first quarter, registering levels above 4.0% for the first time in seven years. This data reinforces expectations that the Reserve Bank of Australia could soon again hike rates. Currently Australian rates are at 7.25%, significantly higher than other G7 nations and making the Aussie very appealing on a yield basis.

US$ Stays in Recent Ranges, Bank of Canada Cuts Rates Again

The US$ fell yet again overnight as traders continue to shun the greenback as mounting concerns about a US economic slowdown and lower rates weigh on the currency. The weakness in the US housing market continues to steer trade, as it appears write-downs at banking institutions are likely to persist for some time. This weakness in the overall economy, coupled with tightened lending standards at various financial institutions has led the market to speculate that the Fed will cut rates next week. Markets have currently priced a 25 basis point rate cut next, although expectations for no actions have crept into trade. Currently futures markets have begun to speculate with an 86.0% probability that rates drop 25 basis points, while 14.0% of traders think that the Fed will refrain from action. Should the Fed NOT cut rates next week, it is likely that the US$ could enjoy some short-term boost. In the interim, however, the market will focus on US economic releases. At 10:00 a.m. Existing Home Sales are to be released, expected to register a decline to 4.92 million units in March, down 2.3%. In addition, the Richmond Fed Index is to be released expected to decline to a reading of –1. With traders squarely focused on housing and the continued drag on the economy, weakness in this number will likely promote a further downward push on the US$, while any signs of recovery could lead the US$ higher.

The euro gained overnight after comments from additional ECB officials further stressing the Bank’s inflation-fighting resolve. ECB Council Member Christian Noyer stated that the Bank would act to restrain consumer prices if inflation does not slow. He further stated that it is the ECB’s aim to push inflation below 2.0%, next year. Also he went as far to say that “if needed we will move rates (higher).” This environment of strong rhetoric from ECB hardliners further reinforces the appeal of the euro on a yield investment basis. With a hawkish ECB in the forefront contrasted with a US Fed, likely to cut rates next week, the euro will continue to remain well supported against the US$.

The yen continues to consolidate in recent ranges as traders remain uncertain about the overall health of equity markets and financial markets in general. As equity markets appear to have stabilized, traders are cautiously reentering “carry trades,” financed with short yen positions. However, with risk aversion prevalent in credit markets, further yen losses are likely to be limited. Libor money market rates remain at the highest levels since March 7, at 2.92% (significantly above the Fed’s target of 2.25%) as banks continue to hoard cash as the prospect of further write-downs and balance sheet duress remains. Until this credit risk is removed from markets, the yen will be relegated to ranges.

The pound rallied overnight as traders have begun to speculate that the Bank of England’s plan to bailout troubled lenders by swapping government bonds for depressed mortgage backed securities, will delay the timing of any future rate cutes from the Bank. As interest rate expectations continue to steer trade amidst an environment of a weakened US$, sterling was able to rebound from its lows of yesterday. Expect this push and pull of the pound to continue for some time as interest rate expectations ultimately steer the UK currency.

The Canadian Dollar dropped this morning after the Bank of Canada cut interest rates 50 basis points to 3.0%, the lowest levels since December 2005. Although this move was widely expected, the Bank signaled that further rate cuts could be forthcoming as concerns about a slowdown in the Canadian economy similar to the US, could ultimately steer policy.

US$ Falls Against Euro, Yen

The US$ diverged in direction overnight, falling against the euro and yen, while gaining against the pound as diverging pieces of news steer the US$. The market remains steadfastly focused on a slowing US economy and the prospect for further rate cuts when the Fed meets next week. Currently futures markets have priced in a 100.0% chance of a 25 basis point cut on April 30th; however, there are some growing rumbles that the Fed could refrain from any rate cuts. This week the market will focus on the slew of US economic data slated for release with an eye to surging oil markets. Oil traded to a new all-time high overnight above $117 per barrel, adding further to global Central Banker fears about the prospect of renewed and sustained inflation. With an inflation-influenced background, traders will certainly watch US economic releases this week. While no data is slated for release today, tomorrow yields Existing Home Sales and the Richmond Fed Manufacturing Index. Wednesday sees the release of Mortgage application data, while Thursday sees the release of Durable Goods, Weekly Jobless Claims and New Home Sales. The week winds to a close with the release of U. of Michigan Confidence. Expect trade to continue to remain volatile as markets will likely soon test the resolve of G7 officials, driving the US$ lower.

The euro gained overnight after comments from ECB officials reiterated their concerns that inflation is accelerating, likely forcing the Central bank to keep rates elevated through this year. ECB policy maker Claus Leibscher stated today that record oil prices are beginning to push wages higher, accelerating inflation pressures. These comments follow those from fellow ECB board members Weber and Liikanane this weekend who both suggested that rising inflation might soon warrant a rate hike to control price gains. This hawkish assessment by ECB policy makers helped push the euro higher overnight, within a cent of the all-time highs. Further helping the euro higher were statements from both Deutsche Bank and UBS, suggesting that the G7 would not intervene in currency markets and tolerate a weaker US$.

The yen gained modestly overnight as traders still jockey positions around the “carry trade.” With investor confidence gradually returning to markets, traders are tepidly reentering the “carry trade” to purchase equity positions. Expect the yen to continue to remain a barometer for risk, trading in wide ranges influenced by market views about the health of credit and financial markets.

The pound fell overnight after the Bank of England unveiled a plan to relieve the crisis in money markets and following a report revealing a continued decline in housing prices. The crux of this plan involves the Bank of England exchanging government bonds for a wide-range of mortgage-backed securities. The BOE hopes this move will boost liquidity in credit markets. As this move was widely expected, sterling was hit more by the release of report showing that UK property prices fell 0.1% from March, further reinforcing the view that the Bank of England will cut rates further this year. These expectations for lower rates will continue to weigh on sterling.

US$ Gains - The Worst May Be Behind It

The US$ received a much-needed breather today against the euro and yen after being consistently on defense throughout much of this year. Despite no significant economic data being released this morning, good news from U.S. corporates has helped to allay concerns of a significant and prolonged U.S. recession. Google started the earnings reports yesterday after equity markets closed, blowing out street expectations. This was followed by Citigroup, which reported first quarter revenue this morning that beat analysts’ expectations. This has helped equity futures to rise nearly 150 points above fair value on the Dow Jones Industrial Average and 16 points higher on the S&P 500. The good news from corporations has helped to depress expectations of a 50 basis point cut by the Federal Reserve in April. Expectations for an interest rate cut to 1.75% fell to 12%, while expectations increased to 88% that the Fed will cut by 25 basis points. Therefore, investors have begun to focus on the fact that the Fed is, more likely than not, at the end of its easing cycle. Though the interest rate cuts will take some time to enter the market, it should support the thesis that the worst is behind the U.S. economy. This confluence of factors has helped the US$ in a time when it was also being supported by rhetoric from the ECB and G-7. The market will focus next week on the next round of economic data, which begins with existing home sales on April 22nd. A fall in home sales is expected, but might serve to focus the market on the still-weak U.S. fundamentals.

The euro fell overnight as the market abandoned longs in the wake of better than expected U.S. news. Despite strong Eurozone inflation data, which initially helped the euro strengthen to test its all-time high, the euro fell sharply as investors squared long positions. Despite some outliers, the overall Eurozone economy is fundamentally sound, and there are no signs that the ECB will lower interest rates any time soon. This should help to stem any gains that the US$ might otherwise experience.

The yen fell sharply helped by a rebound in investor confidence and a renewed emergence of the carry trade. Recent equity market gains and overall market stability has helped to bolster confidence. The gains in confidence have had the opposite impact as the erosion of confidence did, helping the US$ gain significantly. Additionally, overnight the Japanese government lowered its forecasts for business confidence in the world’s second largest economy. This will help speculation mount that the Bank of Japan might lower interest rates to 0.25% by the end of this year. Low interest rates should continue to foster an interest in the carry trade, specifically as long as the global economy and confidence continues to steady.

The British pound was flat overnight despite gains by the US$ against other major currencies. Sterling has recently been supported as news was revealed that the Bank of England might change some of its collateral requirements to follow the Fed’s move in easing credit. The proposal allegedly will take some $60 billion of mortgages off of lenders’ balance sheets, helping to stoke speculation that the Bank will be able to leave interest rates higher despite continuing concerns. This will continue to support sterling should the BOE definitively halt its rate cutting cycle.

Good Bout of US Data Today Helps the Greenback Strengthen Slightly

The US$ traded in rather flat ranges overnight against the euro and yen, while gaining against the pound as traders have apparently ignored commentary from the G7 and instead focused on tightened credit markets and the continued slowdown in the US. Yesterday, Wachovia Bank announced its first quarterly loss since 2001, as it appears the credit market contagion is spreading. Adding to these worries has been the continued spike in LIBOR rates. Overnight LIBOR US$ rates surged to the highest levels in over two weeks, reinforcing the view that Central bank actions are doing little to ease the credit crunch. However, there has been an interesting development in markets this morning with the release of much higher than forecast US PPI data. PPI surged 1.1% last month and registered a gain of 6.9% year on year. These readings were significantly higher than many analysts had forecast and have had the welcome effect of temporarily boosting the greenback. With inflation now gaining a solid footing in the US economy, the scope of further rate cuts from the Fed will almost certainly be limited. The result has been a shift in future markets back to favoring a cut of only 25 basis points on April 30th, with 58.0% probability assigned to such a cut and only a 42.0% chance assigned to a 50 basis point reduction. The market will next shift its attention to TICS data (Foreign purchases of US Securities) at 9:00 a.m. and expected to register $72.5 billion. However, it is the focus on inflation and the limits on the scope of Fed interest rate policy that should ultimately steer the US$. Expect traders to also remain solidly focused on the emerging prospect of stagflation in the US economy. This could ultimately have a significantly negative effect on the US$.

The euro continues to trade in tight ranges just below the currencies all-time highs against the US$, as traders seem to have shunned warnings from the G7 this past weekend and instead have opted to focus squarely on interest rate differentials between the US and the Eurozone. Traders remains convinced that the ECB will keep rates at current levels as the Central Bank aims to tackle a growing inflation problem. An overnight release revealed that French inflation accelerated in March at the fastest pace in over 12 years. This data reinforces the ECB’s inflation fighting hawkish posture and will likely continue to attract investors to the common currency. Expect this continued focus on interest rate differentials to push the euro higher ultimately to new all-time highs.

The yen continues to consolidate in recent ranges as investor appetite for risk and the use of the “carry trade" steers the Japanese currency. With US equity markets seemingly treading water, traders have looked to other asset classes to generate returns. Recent gains in commodity markets have prompted a gradual reintroduction of the “carry trade,” a trade whereby investors short yen and invest the proceeds in other vehicles. With Japanese interest rates at 0.5%, this trade remains favorable as long as trends steer trade in other markets. Expect the yen’s direction to continue to be determined by investor appetite for risk and the use of this “carry trade,” ultimately regulating the currency to wide ranges.

The pound fell overnight, declining to a record low against the euro after the release of data revealing that consumer prices gained at a slower than forecast pace last month and property markets registered the worst decline since records have been kept in the UK. CPI remained at 2.5%, lower than the 2.6% rate forecast by economists. In addition, housing prices in the UK continue to decline. 78.5% of agents reported housing prices dropped in February, the worst results since at least 1978. Both of these economic releases enhance the argument for further rate cuts from the Bank of England this year. This environment of reduced rate expectations will continue to weigh on sterling.

G7 Fails to Do Much to Help US$ Rally

The US$ fell overnight despite some strongly worded commentary from the G7 and an initial rally in Asia. The G7 warned that “sharp fluctuations” in exchange rates risk hurting the global economy. In addition, officials stated that they would “monitor exchange rates closely, and cooperate as appropriate.” However, this sounding of the alarm about the weakest US$ since the 1970s appears to have fallen on deaf ears. As the market believes it is unlikely that the G7 will act in markets with direct intervention, by buying the US$, traders seems to be quickly testing the resolve of the Central Bankers and Finance Ministers. It now seems unlikely that the US$ will reverse its course without such US$ purchases from government officials. Adding to the market testing the resolve of G7 officials is a growing fear that the US economy is still stumbling into recession as growth slows and the credit crisis worsens. Wachovia Bank reported an unexpected loss for the first quarter, its first quarterly loss since 2001, reigniting fears that credit related losses are continuing to spread through the banking sector. In addition, recent economic releases continue to point to a slowdown reinforcing the likelihood of further rate cuts from the Fed. Futures markets are currently evenly split between the prospects of a 50 basis point and a 25 basis point cut from the Fed when they meet on April 30th. There is currently a 52.0% probability assigned to the likelihood of a 50 point reduction with a 48.0% chance assigned to a 25 basis point cut. This morning Retails Sales were released at a slightly better than forecast gain of 0.2%, however, there was little affect on US$ direction. This week there are several important pieces of data released that the market will be closely monitoring. These include PPI and TICS data tomorrow. CPI, Housing Starts, Industrial Production and the Fed Beige Book are released on Wednesday. Weekly Claims, Leading Indicators and the Philly Fed Index will be released on Thursday. The market will be closely monitoring both CPI and PPI this week for any signals that inflation pressures have begun to surface. Should this data show rapid gains, (very likely given the recent surge in food and energy prices), the Fed will likely find itself painted into a corner, as the mention of “stagflation” will certainly push to the forefront.

The euro reversed many of its early overnight losses following commentary from several ECB officials concerning the direction of Eurozone interest rates. ECB Board Member Mersch stated that he believes that the ECB cannot afford to cut rates this year given that inflation is accelerating above the Bank’s 2.0% ceiling. These comments reaffirm the hawkish tone of the bank surrounding interest rates and will likely continue to promote euro strength on an interest rate yield basis. However, there seems to be some disagreement between finance officials and Central bankers surrounding overall US$ direction. French Finance minister Christian Lagarde stated that she hopes that the “concerted wording” of the G7 statement reverses the US$’s course. Whether this occurs remains to be seen, however trader seems poised to test the resolve of Central Bankers and continue to buy the euro.

The yen gained modestly overnight as US equity markets are poised to tumble this morning as traders still digest the news from GE at the end of last week and after the surprise announcement by Wachovia of a quarterly loss. With the yen continuing to remain a barometer for market risk, traders use the currency as a surrogate to hedge their appetite for such risk. Expect the volatility in these markets to continue to steer the yen in wide ranges.

The pound rallied overnight after the release of data in the UK pointing to mounting inflation. UK producer prices accelerated 6.2% from a year ago as raw material prices surged some 20.6% over the same time period. In addition, a report revealed that UK factory prices increased at the quickest pace since 1991. These signs of accelerating inflation pressures will likely limit the scope for further rate cuts from the Bank of England. Last week the BOE reduced rates 25 basis points. This reduction in the probability of further rate cuts from the UK Central Bank helped the pound accelerate overnight and will likely limit further short-term losses.