The Pound plummeted to a six week low against the Dollar yesterday while the UK currency also declined against the majority of the major currencies, dropping to a low of 1.2589 versus the Euro after a report from HSBC Holdings Plc posted the steepest earnings decline since 2001.

Net income for the first half of the year dropped 29% from this stage in 2007 while shares in HSBC fell 1.1% after the Chairman, Stephen Green, said that the economic outlook is deteriorating, rekindling the concern over the state of the financial sector.

Elsewhere, the Pound also succumbed to report from the Chartered Institute of Purchasing and Supply, which showed that growth in the construction sector shrank at the fastest pace in eleven years last month.

The UK building industry accounts for roughly 6% of gross domestic product and with growth in services, manufacturing and home building falling into negative territory, the probability of a recession has increased significantly over the past month.

The Bank of England’s monetary policy committee convene this Thursday and the Pound is suffering in the build up to the announcement amid speculation that the worsening economic climate will convince policy makers to lower interest rates.

The Euro took advantage of broad Sterling weakness yesterday while the single currency stood firm against a resurgent U.S Dollar after a report on European producer prices increased the probability that ECB policy makers will retain a hawkish stance this week.

The so called gauge of factory-gate inflation showed that prices rose by the most in at least 18-years last month as energy costs continued to soar higher.

Prices have increased 8% from a year ago as factories have little choice to pass on record high raw material costs to the consumer and the index, which was ahead of expectations, rose by the most since records began in 1990.

The Euro’s resolve will be tested this morning as the focus switches back to the declining sentiment spreading through the economy as a government report on the consumer sector is expected to report a 1.2% drop in retail sales.

The Dollar traded through the trend support at 1.9650 versus the Pound yesterday, rising to a six week high by the close of trading last night, after crude oil prices fell below £120 a barrel for the first time in almost three months amid speculation that a tropical storm mill miss offshore refineries.

Oil prices fell as much as $5.60 a barrel on the session despite the continued threats to supply in the Middle East as Iran stand firm on their enrichment policy and ignore calls from Israel and the U.S to suspend the program.

The geo-political issues that have previously pushed the price of crude oil to the highest level on record at $147.60 a barrel are seemingly having little affect on current market conditions as traders move away from commodities as a hedge against inflation.

The focus today will inevitably fall on the FOMC rate decision this evening and the Dollar’s resolve will be tested in the aftermath of the announcement as policy makers are expected to keep interest rates unchanged at 2.0% this month while emphasising the risks to both inflation and economic growth.

Data Released 5th July

U.K 09:30 CIPS Services PMI (July)
U.K 09:30 Industrial Production (June)

- Manufacturing Production

EU 09:00 RBS Services PMI (July)

EU 10:00 Retail Sales (June)

U.S 15:00 ISN Non-Manufacturing (July)
- Business Activity
U.S 19:15 FOMC Rate Decision

written by Adam Solomon