The tumbling Pound is on course for the worst year since the end of the last recession and despite falling more than 10% already this year, the New York based hedge fund company International Foreign Exchange Concepts Inc, said yesterday that the Pound is still about 20% overvalued against the Dollar despite the recent move.

The reckless comments from Chancellor Darling last week have weighed on Sterling sentiment and traders are stating to the take the British government at its word as the worst housing recession in 18-years threatens the biggest economic slowdown since the second World War.

Nevertheless, the Bank of England kept UK interest rates unchanged at 5.0% for a fifth straight month in September as consumer price inflation accelerated to 4.4% in July and more than double the government's 2.0% target.

However, the futures market is slowly pricing in up to 100 basis points of cuts over the next 12 months and the Pound lost further ground yesterday after UK producer prices unexpectedly dropped by the most in at least 22-years in August.

Prices charged by factories slumped 0.6% from July, the first decline since October 2006 and the biggest since records began in 1986 after oil and raw material costs fell 25% over the same period while economic growth stalled.

Weakening prices pressures may give the Bank of England the scope to lower borrowing costs in the near-term as the UK benchmark lending rate remains the highest among the Group of Seven nations but a number of statements from BoE officials indicates that policy makers are still concerned that inflation will accelerate.

The Pound has traded as low as $1.7507 against the Dollar this morning and the latest chart attached shows that the recent downside move against the U.S currency almost mirrors the trend in 1992 after the market peaked at $2.00 and sharply fell to $1.4000 in the months that followed.

The Dollar rallied to the highest level since October against the Euro yesterday as the U.S currency also enjoyed a sharp intraday move versus a basket of currencies as news broke of the government's takeover of Fannie Mae and Freddie Mac.

The Australian and New Zealand Dollar also benefited from the news amid speculation that the bailout will encourage trader to buy higher-yielding assets funded by loans made in Japan.

The Federal Reserve and U.S government have reduced borrowing costs by 325 basis points this year in an attempt to revive growth and their efforts seem to be working as a number of key industries bounce back from negative growth.

The Dollar rose 1.4% against the Euro to a high of $1.4068 in New York as the government seized control of the troubled companies following the biggest surge in mortgage defaults in at least 30-years threatened to curb growth in the companies making up almost half of the U.S home loan market.

Data Released 9th September

OPEC Meeting in Vienna

U.K 00:01 BRC Retail Sales (August)

U.K 09:30 Industrial Production (July)

- Manufacturing Output

U.S 15:00 Pending Home Sales (July)
U.S 15:00 Wholesale Inventories (July)

written by Adam Solomon