Following on from last week, the Pound declined heavily against the Euro, dropping 4.1% to yet another record low of 1.0470 and perilously close to parity amid another historic week for financial markets as the Federal Reserve cut U.S interest rates to a range between zero and 0.25% and investors speculated on the probability of the Bank of England following their example.

The UK currency also lost ground against the Dollar, slipping back under $1.5000 on Friday as UK unemployment rose in November at the fastest pace since 1991, while retail sales declined further and the minutes from the Bank of England's last policy meeting showed that policy makers even considered a bigger reduction in December.

The increase in the UK jobless rate to the highest level since 1991 has further hampered Sterling sentiment with the claimant count surpassing the 1 million mark for the first time since 2001 as companies’ struggle to overcome the existing financial crisis and slash their workforce.

The monetary policy committee also voted unanimously to cut the borrowing costs to 2.0%, the lowest level since 1951, as the worsening economic climate caused a decline in tax revenue, while the UK budget deficit widened to a record level in November.

In addition, the Pound also cane under pressure as UK mortgage approvals fell 51% year-on-year last month and the language used in the minutes prompted speculation of another aggressive easing in rates next month as policy makers consider lowering borrowing costs to the lowest level in the Bank of England's history.

The abysmal tone of recent UK economic data has illustrated the problems facing the beleaguered UK economy as the government attempts to spur lending and stimulate the economy that has been battered by the global credit crisis and thrust into the worst recession since the 1970s.

The BoE governor Mervyn King and the UK Chancellor Alistair Darling have both expressed the need to revive confidence in the banking system and spur consumer spending but a collaboration of rate cuts and increased liquidity has failed to stimulate growth and the Bank of England may have to resort to a period of quantitative easing to boost growth.

However, a report from the Office of National Statistics on Friday showed that UK retail sales unexpectedly increased in the three months through November as higher food demand for the Christmas period offset declines elsewhere with sales increasing 0.3% on the month after previously falling by the same amount in October.

In addition, a separate report showed that UK consumer confidence improved in December as the cost of petrol prices retreated and the government cut value added tax to 15.0% in an effort to revive the economy by encouraging people to step up spending despite the risk of mass unemployment.

An index of sentiment unexpectedly rose in December as lower energy costs and discounted goods helped bolster sales even as the economy hurtled towards a recession and the cut in tax has helped boost large purchases.

The positive momentum surrounding the Euro saw the single currency rally to a record high against Sterling for nine days consecutively this month and also make strong gains versus the Dollar amid suggestions that the European Central Bank are nearing the end of their easing cycle and are not prepared to drop interest rates under 2.0%.

Nevertheless, ECB governing council member Miguel Angel Fernandez Ordonez said that the Central Bank may cut interest rates in January if inflation expectations were significantly less than 2.0% and his comments over the weekend contrast with the recent rhetoric from the chairman Jean-Claude Trichet who said there is a limit to how far policy makers can cut rates.

From a technical perspective, the Euro may rise to $1.5000 against the Dollar over the next month, extending its 10% advance well beyond the current levels according to a series of numbers known as the Fibonacci sequence.

The Dollar has weakened to the lowest level against the Euro since late September as the Fed opted to cut interest rates to near zero per cent in an unprecedented action to stimulate the economy and the U.S currency subsequently fell for the fourth consecutive week against the Euro as reduction reduced the allure of U.S assets as a haven.

Data Released 22nd December

GER 07:00 Gfk Consumer Confidence Index (January)

GER 07:00 Import Prices

written by Adam Solomon