Following on from last week, the Pound slipped to the lowest level in almost two years versus the Dollar amid concerns that the economy is heading towards a recession while UK banks repossessed the highest number of homes in 12-years in the first half of 2008.

The UK currency declined for a sixth consecutive day against the Dollar on Friday, falling below $1.9200 for the first time since March 2007 as the move correlated with reports that the number of foreclosures jumped 41% from the previous six months as tighter credit conditions and rising prices left consumers unable to maintain mortgage repayments.

Consumer price inflation has almost doubled the government’s 2.0% target but the recent deterioration in the outlook for the UK economy convinced policy makers to keep interest rates unchanged at 5.0% last Thursday.

The Pound fell to a low of $1.9146 versus the Dollar, the lowest since November 23rd 2006, while the UK currency slumped the most in a week since July 2005 amid speculation that the Bank of England will cut interest rates by 50 basis points over the next 12 months.

The overwhelming decline in Sterling sentiment has led many economists to predict that Cable will be under $1.8500 by the turn of the year as further deterioration in the housing market combined with contraction in services and manufacturing will mean that policy makers have little to choice but to reduce borrowing costs and provide some relief to the financial sector.

Nevertheless, the Pound has broken higher against the Euro, closing above the long-standing resistance level at 1.2760 versus the single currency as the dovish tone of the ECB’s accompanying statement increased speculation that policy makers will relent and cut interest rates before the turn of the year.

Considering the weakening sentiment surrounding the UK economy and the outlook for monetary policy, Euro buyers would be well placed to take advantage of this rate or at least a stop order around 1.2700 as we build up to a busy week of economic data.

The focus this morning will fall on the release of the UK producer price index and the report is expected to confirm that prices increased modestly in July, which correlates with commodity prices reaching the highest level on record.

The overwhelming rebound in Dollar sentiment is hardly surprising considering the dramatic slump in commodity prices as crude oil touched a low of $115 a barrel in New York while inventories increased beyond initial forecasts and demand in the U.S weakened.

The Dollar’s resolve will surely be tested this week as government report is expected to highlight that retail sales dropped in July for the first time in five months as record high food and fuel costs sapped spending.

Data Released 11th July

U.K 09:30 Producer Price Index (July)
- Input
- Output

U.K 09:30 Industrial Trade Balance (June)
- Non EU Trade Balance (June)

written by Adam Solomon