The Pound again took advantage of broad Euro weakness, rising above 1.2500 by the close of trading last night, while the UK currency also made robust gains against the Australian Dollar despite two separate reports indicating that the UK economy will go through a recession later this year.

The National Institute of Social & Economic Research released a statement that said UK gross domestic product fell 0.2% in the period between June and August and dropped a further 0.1% in the three months through July.

The first recession since 1991 will be brought about by the momentous slump in the UK property market as prices plummet and financial services struggle to survive in the aftermath of a global credit crunch that has already cost in excess of £250 billion in writedowns and losses.

The Bank of England subsequently cut interest rates on just three separate occasions this year as concerns over rising inflation deterred a more aggressive easing in policy and the UK benchmark interest rate is still the highest among the Group of Seven nations.

UK economic growth stalled in the second quarter and the report from the NISER yesterday further underlines the dwindling sentiment surrounding the outlook for the economy but at this stage the BoE can’t afford to cut rates as consumer prices remain more than double the government’s 2.0% target.

However, a report on Monday showed that producer prices declined by more than initial estimates in August and the so called measure of factory gate inflation provides some optimism that the 30% drop in crude oil prices will begin to feed through to the broader economy.

The Prime Minister Gordon Brown said yesterday that the recent downturn in growth forecasts was due to the tightening credit conditions and surge in oil prices that hit a record level of $147.27 just two months ago.

The European Union also published a report yesterday predicting that growth in the UK economy will contract 0.2% in the third quarter with a similar decline in the fourth.

The Pound subsequently declined against the Dollar, approaching the lowest level since June 2006 by the close last night and the UK currency looks poised for a move towards 1.7500 by the end of this week as oil prices continue to decline and the Dollar gains in momentum.

The Euro continued to hover around $1.4000 against the Dollar yesterday and the single currency appears poised to visit the Fibonacci support at $1.3840 as the European Commission cut its growth outlook for the Euro-zone and predicted a recession for Germany.

The European economy will probably contract this quarter after shrinking in the previous three months through June for the first time since the Euro was introduced in 1999 but the ECB will remain defiant in their fight against inflation, according to a statement from the Chairman, Jean-Claude Trichet.

In a speech to the European Parliament in Brussels, Trichet said that the economy will probably recover from the current slump by the end of the year to bring inflation as the Bank’s primary concern.

Policy makers are staying “resolute” in their determination to keep “medium-to-long term inflation expectations in line with price stability” as the past increase in oil prices will force companies to hike prices while policy makers are concerned that a wage spiral could ensue as the cost of living rises.

The overwhelming increase in the Dollar saw the U.S currency rally to an 11-month high against the Euro yesterday, which coincided with the price of crude oil falling through $100 a barrel after U.S reports indicated a slump in demand.

Data Released 11th September

EU 09:00 ECB Monthly Bulletin Published

U.S 13:30 Initial Jobless Claims (w/e 5th September)
U.S 13:30 International Trade Balance (July)
U.S 13:30 Export Prices (August)
- Import Prices
U.S 19:00 Fed Budget (August)

written by Adam Solomon