The Pound slumped to fresh weekly low against the Euro yesterday, dropping towards 1.2300 by the close of trading last night, while the UK currency also endured a choppy day’s trading versus the Dollar, falling to a low of $1.5608 in early trade before rising back towards $1.6000 on the U.S Presidential election day.

The UK currency has declined for three straight days now against the Euro and the latest downside move was instigated by a government report that showed UK construction contracted in October, giving the Bank of England yet more reason to cut interest rates aggressively over the coming months.

The slump in the building industry, which currently accounts for just 6% of UK gross domestic product, contracted at the fastest pace in more than a decade and just perpetuates the view that the economy is in the depths of a recession.

The UK government have taken decisive steps to alleviate the financial crisis, injecting more than £37 billion in emergency funding to struggling banks and lenders and the Bank of England’s monetary policy committee will probably cut rates by a further 50 basis points this week in the latest move to provide stability.

Policy makers cut the benchmark lending rate of October 8th in conjunction with six other major central banks in an effort to avoid a collapse of the global financial system and the Pound is under a great amount pressure amid speculation that the MPC will slash rates by more than half a percentage a point.

Nevertheless, despite the dwindling sentiment surrounding the Pound and the outlook for the economy, UK stocks advanced for a sixth straight day, lifting the FTSE 100 Index to more than 20% from its 2008 low as gains in retailers led the surge following reports that Marks & Spencer Group Plc first half net income beat analyst estimates.

A recent report from the Office of National Statistics showed that the UK economy fell into negative growth for the second straight quarter in the three months ending in September and the European Commission predicted this week that UK growth will contract 1% next year.

The recent revival in risk appetite is doing little to support Sterling sentiment as the allure of the Pound as a high yielding asset is dwindling with the prospect of an aggressive easing of interest rates down to 2.0% by the end of next year.

The dwindling sentiment for Sterling was perfectly portrayed in the currency’s performance against the Australian Dollar despite the earlier cut in interest rates, which exceeded earlier expectations.

The Australian Central Bank slashed borrowing costs by a larger 75 basis points, the third reduction in as many months, despite analyst’s predictions of a more reserved 50 basis point cut but the Pound was unable to take advantage, slipping below 2.3000 from 2.3707 earlier in the day.

Elsewhere yesterday, the Royal Bank of Scotland Group Plc, one of the banks nationalised by the government during the credit crisis, abandoned its full year profit forecast as the losses linked to the collapse of the U.S subprime mortgage market escalated and ‘bad’ debt increased.

The Bank said yesterday that it had wrote down £1 billion in the month of October alone against assets tied to Lehman Brothers Holdings Inc and the collapse of the Icelandic banking system.

The resurgence in the Euro continued to gather momentum yesterday as the single made widespread gains against the majors despite reports that European producer prices slowed more than anticipated in September.

The so called factory-gate measure of inflation rose 7.9% from a year earlier after increasing 8.5% in August and the decline in prices mirrors the plunge in oil prices over the same period, which have fallen a third since the all time record high in July.

Easing inflationary pressures is giving the European Central Bank the scope to cut interest rates as policy makers look to limit the damage from the global credit crisis and spark a revival in interbank lending.

In the build up the U.S Presidential Election, the Dollar fell by the most against the Euro since the single currency’s introduction in 1999, while the revival in risk appetite and the thaw in money markets reduced demand for the security of U.S assets.

U.S stocks gained yesterday in the biggest election day rally since 1984 with the S&P 500 Index closing above 1,000 for the first time in almost a month, increasing 4.1% on the session as the speculation surrounding the outcome of the election continues to support risk.

Data Released 5th November

U.K 09:30 CIPS Services PMI (October)

U.K 09:30 Industrial Production (September)

- Manufacturing Output

EU 10:00 Retail Sales (September)

U.S 13:15 ADP Employment report (October)

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

- Business Activity

written by Adam Solomon