The Pound resumed its upside momentum against the Dollar yesterday, rising to a high of $1.5510 on the session, while the UK currency also strengthened for a third straight day versus the Euro after a bounce in global stocks helped boost demand for risk appetite and spur demand for higher yielding assets.

Sterling subsequently climbed against 14 out of the 16 most actively traded currencies as the FTSE 100 Index gained 2.1% to record its third advance in three days, while a report from the Nationwide Building Society showed that UK house prices declined less than initial forecasts in November.

A slump in global growth and almost $1 trillion of losses and writedowns at financial institutions has fuelled demand for the relative safety of government backed bonds but the incredible injection of emergency funding by Central Banks worldwide has created an element of risk appetite that will continue to support Sterling in the short-term.

The rally in UK stocks is providing a supportive environment for the Pound and yesterday’s move may also be exacerbated by the lack of the liquidity in the market due to the U.S Thanksgiving Day holiday and therefore Sterling may be unable to sustain this recent momentum due to the deteriorating outlook for the economy.

The Pound has declined nearly 25% in value against the Dollar this year and a further 12% versus the Euro as the global financial crisis and slumping house prices sent the UK economy into the grip of a recession that may last well into 2009 according to recent estimates by the Banking of England.

The Bank’s forecasts confirm that the economy has probably fallen into a recession in the third quarter and the slump in growth is expected to last until the middle of 2009 as policy makers are seemingly prepared to cut interest rates to whatever level deemed necessary in order to revive growth.

The bright side of the Pound’s monumental decline in value does have its advantages as a weaker currency will improve the competitiveness of UK exporters and that should help improve output even as global demand shrinks.

UK house prices have fallen for a 13th consecutive month in November as the ongoing financial turmoil and restricted lending conditions deterred homebuyers, while consumer spending has fallen by the most since 1995 in the third quarter and unemployment rose higher.

The impact of the credit crunch is filtering through to the high street as the decline in spending has culminated in reports that Woolworths Plc placed its stores into administration, while MFI Retail Ltd collapsed and put at risk almost 30,000 UK jobs.

The average cost of a home in Britain fell a further 0.4% from October and an unprecedented 13.9% from this stage in 2007 and although the drop was smaller than anticipated, the report indicates that prices will continue to fall over the coming months as Banks struggle to pass on interest rate cuts to the consumer.

The Bank of England have cut interest rates to 3.0% in November and investors are already factoring in a further 75 basis point reduction on December 4th as policy makers try and revive growth and spur lending.

The Governor of the Bank of England Mervyn King said this week that getting banks to step up lending again “is more important than anything else at present” and that sentiment was echoed by the Deputy Governor Charles Bean, who said that the turmoil in credit market may warrant an aggressive easing in the UK interest rate.

Another member of the Bank’s monetary policy committee, David Blanchflower, also said yesterday that the Central Bank is “reacting to events” by cutting interest rates aggressively now, while proactive reductions earlier in the year would have helped the UK remain ahead of the curve and helped ease the effects of a recession.

Blanchflower was advocating the need to cut interest rates in the first quarter of this year, even as inflation accelerated to the highest level in over a decade, and was pressing for a 50 basis point reduction in October before policy makers eventually joined six other central banks and reduced the benchmark lending rate by half a percentage point.

Growth in the UK economy has contracted in the third quarter as the worst financial crisis since at least the Great Depression saw a sharp decline in consumer spending but Blanchflower’s push for lower rates put him in the minority of the nine member MPC as his colleagues focused on bringing inflation back towards target.

The Euro traded close to a three-week high against the Dollar yesterday as European stocks rallied for a fourth consecutive day and reports in Germany showed that unemployment unexpectedly declined in November.

The rise in risk appetite is supporting the Euro, while the Dow Jones Stoxx 600 Index climbed 2.4% as investors speculated that that ECB’s efforts to shore up banks and the economy will support profits.

In addition, the jobless rate in Germany unexpectedly held at 7.5%, the lowest level in 16-years as the number of people out of work falling 10,000 to 3.15 million, which was lower than anticipated and showed that another area of the economy is withstanding the worst recession in 12-years.

Elsewhere, a separate report from the European Union showed that confidence in the Euro-zone fell to a 15-year low this month even after the aggressive easing in interest rates and government stimulus measures to combat the impact of the financial crisis.

Data Released 28th November

U.K 00:01 Gfk Consumer Sentiment (November)

U.K 11:00 CBI Distributive Trades Survey (November)

EU 10:00 Flash Harmonised Index Consumer Prices (November)

EU 10:00 Unemployment (October)

written by Adam Solomon