The Pound plunged against the majors yesterday, relinquishing all of the gains from last week's unexpected upside move as the deteriorating market conditions and aggressive swings in risk sentiment sent the UK currency crashing towards its biggest one-day loss against the Dollar in over a month.

In addition, the Pound came under renewed selling pressure, falling under 1.1800 versus the Euro from a high of 1.2120 overnight, following reports that the UK housing and manufacturing sector fell further into negative growth last month and reinforced speculation that the Bank will cut interest rates this week.

UK house prices declined to the lowest level in nearly three years in November as the bank’s reluctance to pass on recent cuts in borrowing costs to consumers led to tighter lending conditions that starved the property market of credit.

The report from Hometrack Ltd showed that the average cost of a home in the UK fell 8.1% in the 12 months to November to £161,400 and to the lowest level since January 2006 as home values plunged 1.1% on the month, compared with a 1.3% decrease in October.

Elsewhere, a separate report from the Chartered Institute of Purchasing and Supply showed that UK manufacturing contracted at the fastest pace in at least 16-years in November as the index dropped to a reading of 34.4, the weakest since the survey began in 1992.

Manufacturing accounts for roughly 14% of UK gross domestic product and is currently suffering its longest streak of negative growth since 1980 as the result in November was well below initial forecasts and suggests that the slump may continue well into 2009.

The slump in factory output will place more pressure on the BoE to lower interest rates but factories may benefit from the overwhelming decline in commodity prices as oil has fallen roughly two thirds in value since July, while a weaker Pound may boost demand for British made goods.

The Prime Minister Gordon Brown has urged banks to free up credit in an attempt to revive spending and bolster economic growth, while the BoE governor Mervyn King has identified a boost in lending as the key ingredient in improving the outlook for the economy and bring it out of a recession.

The political and economical pressures are mounting on banks to implement measures to help spur lending and the Bank’s monetary policy committee are expected to lower interest rates to 2.0% this week and to the lowest level since 1951, as policy makers combat the recession and housing slump.

UK mortgage approvals fell beyond initial estimates in October, matching the lowest level since 1999, while the Organisation for Economic Cooperation and Development have predicted that the decline in housing will see the UK economy contract by 1.1% next year and by the most since the last recession in 1991.

The government appear poised to do “whatever is necessary” in limiting the impact of a recession and getting banks lending again, while Mervyn King has refused to rule out the possibility of nationalising UK financial institutions in radical efforts to revive credit and cutting the UK benchmark lending rate to zero per cent.

The Pound is likely to extend yesterday’s slump against the majors in the build up to the BoE rate announcement on Thursday but the UK currency was again susceptible to a renewed appetite for risk aversion as UK stocks dropped by the most in almost a month.

The Euro made significant gains against the struggling Pound yesterday but the single currency failed to cling to recent gains made versus the Dollar as investors flocked to the U.S currency as a relative safe haven amid renewed market turmoil.

Euro-zone manufacturing shrank as it did around the world with the financial crisis entering its 17th month, providing further evidence that the global economy is in the grip of a recession and placing further pressure on policy makers to react with further cuts in borrowing costs.

Factory production contracted in the U.S at the fastest pace in 26-years in November, while the equivalent index in the Euro-zone slumped and pushed down stocks that sent yields on U.S treasuries to record lows as investors sought the sanctuary of the safest assets.

The record drop in European factory output in the 15 nations that share the Euro showed that the PMI index dropped to a reading of 35.6 from 41.1 in October to remain below the expansion threshold for a sixth consecutive month.

Recent reports have indicated that the European economy has entered its first recession in 15-years and that has led to renewed calls for the ECB to accelerate the pace of monetary easing having reduced the benchmark lending rate by 100 basis points in this cycle.

The Central Bank’s governing council members are under pressure to implement an aggressive cut in rates this week but policy makers will probably cut by another 50 basis points with some members arguing that a gradual approach is needed to ensure that inflation expectations are anchored.

The retreat in global stocks helped the Dollar break back below $1.5000 against the Pound despite separate reports that U.S manufacturing also shrank in November and at the steepest rate in 26-years as a global industrial slump that began in the U.S spreads around the globe.

The chairman of the Federal Reserve Ben Bernanke said yesterday that he has limited room to lower interest rates below the current 1.0% and policy makers may have to utilise less conventional techniques, such as buying treasury securities, to revive the ailing economy.
Data Released 2nd November

EU 15:00 Producer Price Index (October)

U.S Vehicle Sales (November)

weritten by Adam Solomon