Daily Insight

The negative sentiment surrounding the Pound took on a fresh impetus yesterday as the UK currency slumped to a fresh record low against the Euro and breached below the $1.5000 level versus the Dollar for the first time since 2002 after the Bank of England indicated that policy makers will keep reducing interest rates.

The Pound also plummeted against the lower-yielding currencies as a strong element of risk aversion crept back into the market, which was evident with the reaction in the U.S stock market as the Dow Jones sank towards the October lows.

The statement from the Bank of England also indicated that the annual pace of UK inflation will slow “well below” the 2.0% target over the coming months and that will provide policy makers with yet further scope to slash interest rates from the current 3.0%.

When asked by reporters yesterday whether policy makers would take rates to zero, King replied that the MPC “are prepared to cut the bank rate to whatever level is necessary” in order to prevent a recession from fuelling deflationary pressures and bring inflation back towards target.

The Bank’s monetary policy committee elected to slash interest rates on two occasions over the past month, reducing the benchmark lending rate by 1.5% in November to the lowest level since 1955 and yesterday’s omission from Mervyn King suggests that they are well behind the curve and quick action is necessary.

The declining outlook for the UK economy is putting the Pound under massive selling pressure as a government report yesterday showed that unemployment claims rose to the highest level since March 2001 and added to recent evidence that the economy is entrenched in a recession.

The number of people out of work and claiming benefits has increased 36,500 to 980,900, the single biggest monthly increase in 16-years, and the report follows a pretty gloomy assessment by the Prime Minister Gordon Brown, who said that the nation should prepare for the worst as the economy stumbles towards contraction.

His comments mark a shift in tone for the government, which has maintained for the better part of a year that the UK is better placed than other nations to cope with the global credit slump but now it seems that Brown is preparing voters for a deep and prolonged recession.

The downturn in sentiment has deteriorated exponentially over the past month and the subsequent increase in the unemployment rate has fuelled concerns that over 2 million will be out of work and claiming benefits by Christmas and that has caused a significant decline in retail sales.

Therefore, consumer spending is unlikely to be strong enough to boost growth over the coming months, while the overwhelming slump in home values and tighter lending restrictions means that the UK economy will be unable to spend its way out of a recession.

The Pound has subsequently declined against the majority of the majors and after breaking through the major support at 1.2200 versus the Euro, the UK currency appears poised to make further losses after recording a low of 1.1905 by the close of trading last night.

UK stocks also slumped for a second consecutive day, led by a drop in commodities and the dwindling sentiment surrounding the outlook for the economy may see the Pound consolidate under $1.5000 versus the Dollar as traders look for the security of safe haven assets.

The Euro is gathering in momentum against the Pound but the single currency made further losses versus the Dollar as European industrial production declined by the most in almost seven years in September.

Factory output in the 15 nations that make up the Euro-zone fell 2.4% from this stage in 2007 to record the biggest annual decline since February 2002 and there is little prospect for an improvement as the economy stumbles through the first recession since the Euro’s introduction in 1999.

As the economic outlook deteriorates, the European Central Bank have reduced interest rates by one percentage point already over the past two months and the prospect of a further reduction has been improved following the dramatic slump in oil prices that is feeding through to the broader economy.

Data Released 13th November

EU 09:00 ECB Monthly Bulletin Published

U.S 13:30 Initial Jobless Claims (w/e 7th Nov)
U.S 13:30 Trade Balance (September)
U.S 19:00 Federal Budget (October)

written by Adam Solomon