The Pound fell close to the lowest level since April 2006 against the Dollar and the outlook for the UK currency versus the Euro remains subdued after a report from the Nationwide Building Society showed that consumer sentiment fell to the lowest level in at least four years.

Recent estimates indicate that the UK economy stagnated in the second quarter and the report yesterday showed that growth is stumbling towards contraction as the pressure builds on the Bank of England to cut interest rates.

UK consumer confidence held at the lowest level since at least May 2004 while a separate report from the Chartered Institute of Purchasing and Supply showed that an index of service sector growth unexpectedly increased in August, although it’s still below the level of 50 to indicate expansion.

The Government’s announcement yesterday to inject £1 billion into the UK property market in a bid to shore up the economy was greeted with cynicism by the market as the Pound continued to decline against the majority of the majors, falling to a new two and a half year low of $1.7668 versus the Dollar.

The focus today will inevitably switch to the Bank of England interest rate announcement at midday and despite the rising speculation surrounding a rate cut, policy makers are widely expected to keep borrowing costs on hold at 5.0% as consumer prices remain more than double the government’s target.

The Euro fell to the lowest level against the Dollar in over seven months after another spate of negative economic data showed that European retail sales and business investment dropped more than initial forecasts in August amid concerns that the U.S led global slump has spread to Europe.

Consumer spending and exports slumped in the second quarter, helping drag the economy to a 0.2% contraction, while corporate investment fell 1.2% to record the first decline in five years and push the economy towards the brink of a recession.

Despite the obvious risks of an economic slump, the European Central Bank refuse to lower interest rates and the Central Bank are expected to keep borrowing costs on hold at 4.25% this lunchtime with the focus switching to the accompanying press conference.

The tone and language used in Trichet’s statement may provide traders with some insight into the outlook for interest rates over the coming months and it will be interesting to gauge whether policy makers are prepared to concede that inflation should ease as oil prices retreat.

The further decline in oil prices continues to bolster Dollar sentiment and the U.S currency rallied to a seven month high against the Euro yesterday after a report from the Commerce Department showed that factory goods orders unexpectedly increased at the start of the third quarter.

The 1.3% gain in bookings followed a 2.1% increase in June and the data yesterday supports the view that the economy will bounce back in the second half of the year but a U.S led global recession and a stronger Dollar may curb demand for exports.

As the focus switches to the interest rate announcements in Europe and the UK, the Dollar may be susceptible to reports from the Institute of Supply & Management, which may show that manufacturing growth fell further into negative territory last month.

A separate gauge of the report may show that business activity grew modestly in August while the ADP employment report should show that the economy lost a further 20,000 jobs over the same period and the index could provide an insight into non-farm payrolls on Friday.

Data Released 4th September

U.K 12:00 BoE Rate Announcement

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference & Revised Economic Forecasts

U.S 13:30 ADP Employment (August)

U.S 13:30 Labour Costs (Q2 Revised)

- Productivity

U.S 15:00 ISM Non-Manufacturing (August)

written by Adam Solomon