Following on from last week, the gloomy outlook surrounding the outlook for the UK economy combined with Chancellor Darling’s reckless comments in the Guardian newspaper conspired to drive the Pound 2% lower against the majors as the UK currency touched a fresh record low versus the Euro.

Credit Suisse overnight index swaps have gone from pricing in 75 basis points worth of cuts on the 29th August to almost 100 basis points on the close on Friday despite the Bank of England’s decision to keep interest rates on hold at 5.0% in September as consumer prices remain more than double the government’s 2.0% target.

The Pound subsequently dropped for a seventh consecutive week against the Dollar and a fourth straight week versus the Euro as the pessimism surrounding the outlook for growth suggests that the UK economy is hurtling towards a recession.

A report from HBOS Plc, the UK’s largest mortgage provider, showed that the economic slowdown is deteriorating as house prices fell for a fifth month in August and property values are expected to slip 35% from last year as the Bank of England begin a period of monetary easing.

The Pound has weakened 8.2% against the Dollar in August and the UK currency may trade as low as $1.68 over the next year as speculation increases over a 15 basis point reduction in rates next month.

In terms of economic data, the focus this week will fall on the UK producer price data this morning and the report is expected to reflect the weakening inflationary pressures in August following the 25% drop in commodity prices.

Elsewhere, the Pound may continue to struggle as UK industrial production is forecasted to contract for a fifth consecutive month while the BRC retail sales survey will indicate a further drop in confidence.

However, the UK currency continues to look extremely oversold and if the U.S Dollar finally retraces some its recent gains, Cable could see an upside gain despite the deteriorating outlook for the economy.

In addition, the Pound bounced back above 1.2360 versus the Euro on Friday as the single currency struggled to stem the losses following the ECB press conference on Thursday where the Chairman, Jean-Claude Trichet exclaimed that the Euro-zone economy faces “an episode of weak activity.”

The deteriorating outlook for growth combined with falling inflationary pressures may see the Central Bank loosen their staunchly hawkish stance on policy and force policy makers to cut interest rates and provide some relief to the consumer.

Elsewhere, the Euro declined after German industrial production slipped more than initial forecasts in July led by a drop in demand for investment as output fell 1.8% from June to further emphasise to downside risks to economic growth.

The Euro may extend its decline to $1.3355 against the U.S Dollar should the pair close below the Fibonacci support between $1.4310 and $1.4365 next week and speculation over a near term rate decrease will continue to weigh on Euro sentiment.

The U.S Dollar end the week virtually unchanged from Thursday’s low despite sharp intraday volatility following the release of the U.S employment report that showed that non-farm payrolls fell more than economists predictions in August.

The deteriorating labour market conditions saw payrolls decline 84,000 last month, marking the eighth consecutive month of contraction in U.S job growth, and worse yet the unemployment rate unexpectedly surged higher to a near five year high of 6.1% from 5.7% in July.

A separate gauge of the report showed a pick-up in wage in demands as average hourly earnings advanced 0.4% and the Federal Reserve face a difficult balancing act as record high food and energy costs feeds into inflation.

The Dollar continues to benefit from the further decline in oil prices and the U.S currency looks to poised to make further gains this week although the retail sales report on Friday could provide significant with spending expected to decline for the first time in six months.
Data Released 8th September

U.K 09:00 Producer Price Index (August)
- Output

U.S 20:00 Consumer Credit (July)