The Pound bounced back from an all-time record against the Euro yesterday and also rallied from the weakest level in six years versus the Dollar as investors judged its recent declines as excessive considering the increasing likelihood that other central banks will match the pace of the Bank of England’s rate cuts.

The UK currency rose towards 1.1900 against the Euro by the close of trading last night, while the Pound also bounced back above $1.5000 versus the Dollar as Sterling enjoyed the biggest gain of all the 16 most actively traded currencies despite losing 24% against its U.S counterpart this year as the economy heads towards a recession.

There is a growing sense in the market that last week’s decline was overdone and the Pound’s bounce against the Euro was exacerbated by ECB policy maker Axel Weber who said that policy makers may lower borrowing costs beyond the current 3.25% in an attempt to boost the economy.

The declining outlook for the Euro indicates that yesterday’s move may be more than just a consolidation as a technical indicator some traders use to forecast price direction bounced above 30 to indicate a rebound was forthcoming.

The Pound also rallied as much as 2.2% versus the Dollar to record the biggest gain since October 29th despite reports from the Confederation of British Industry that said the economy will contract 1.7% in 2009, while Rightmove Plc confirmed house prices slumped by the most since records began in 2002.

The average asking price for a home in Britain declined 7.1% from this stage in 2007 and the apparent weakness in the economy is reflective in the dwindling value of the Pound and that may prevent the UK currency from sustaining any positive momentum in the market.

UK stocks declined yesterday led by a drop in retailers and construction-related companies after Britain’s biggest business lobby said that the economic slowdown in the UK may be much deeper than earlier than predicted.

According to the report from the CBI, UK gross domestic product will contract 1.7% in 2009, the most since 1980 and the catalyst for the Pound’s decline was the omission from the governor of the Bank of England who conceded that the UK economy is already in the grip of a recession.

Investors are still speculating that the Pound will decline to 1.1000 versus the Euro, while finding support at $1.4000 against the Dollar and therefore buyers of either of these currencies would be well placed to take advantage of the current rate bounce or at least place a stop order to protect against further losses.

According to a chief economist at JP Morgan & Chase Co, the Pound will drop 14% against the Dollar to trough at $1.2800, a level not seen since 1985, and a further 9% versus the Euro as the rising unemployment rate continues to hamper an economic recovery.

The Bank of England have reduced interest rates by 2% between October and November with the current benchmark lending rate is at the lowest level since 1955 and policy makers are expected to cut it another 50 basis points on December 4th with the governor Mervyn King prepared to do ‘whatever is necessary.’

The global financial crisis has prompted banks to scale back lending as the cut in borrowing costs will try and spur capital but mortgage approvals held near a record low in September and house prices have declined by 15% last month, the most since at least 1983, according to the biggest lender HBOS Plc.

In addition, UK unemployment rose by the most since 1992 last month and the BoE is prepared to reduce interest rates as low as necessary to prevent deflationary pressures from becoming entrenched in the broader economy.

The annual pace of UK inflation was at 5.2% in September and is expected to slow to an average of 2.8% in 2009 before dropping to 1.2% in 2010 and the figures released this morning are forecast to confirm that consumer prices slowed for the first time since August 2007.

The Dollar fell against the Euro and the Pound yesterday as a contraction in U.S manufacturing added to recent evidence that the world’s largest economy has fallen deeper into a recession.

Factory production in the New York state contracted in November at the fastest pace on record as a global slump in demand curtailed orders, while sales plunged as the index fell to a reading of minus 25.4 and the report also emphasised that a slump in lending is forcing manufacturers to trim output.

The decline in sentiment is just the latest indication that the economy is shrinking as the Commerce Department reported last week that retail sales fell 2.8% in October, the most on record, signalling that the intensifying weakness will further discourage producers and force them to slash prices.

Elsewhere, the Dollar also came under pressure after Citigroup Inc, the U.S bank with the most employees, plans to cut more than 50,000 jobs over the coming months and cut expenses by up to 20% from their peak as the global economy falls into contraction.
Data Released 18th November

U.K 09:30 Consumer Price Index (October)

- Retail Price Index

U.S 13:30 Producer Price Index (October)

- Ex Food & Energy

U.S 14:00 TICs Capital Inflows (September)

U.S 18:00 NAHB Housing Index (November)

written by Adam Solomon