Daily Insight

The Pound continued its downward slide against the majors yesterday, edging closer towards the lowest level on record versus the Euro while the U.K currency also slipped under the support at 1.8300 against the Dollar following the release of the Nationwide housing survey.

UK house prices fell at the fastest annual pace since the first quarter of 1990 as the average cost of a home in Britain fell 10.5% to £164,654 while a separate report from Confederation of British Industry showed that a gauge of retail sales declined to a 25-year low in August.

The negative tone of the reports is just the latest indication that the UK economy is on the brink of its first recession since the early 1990s after gross domestic product failed to expand in the second quarter while the increased cost of living curtailed spending.

The declining sentiment surrounding the outlook for growth has led to speculation that the Bank of England will resume a period of monetary easing as the impact of the credit crisis spreads through the economy and inflationary pressures ease.

Economists are no longer speculating on the probability of a recession and insist that the UK economy has already entered a period of contraction as the recent CBI numbers came in much worse than anticipated and dealt yet another blow to Gordon Brown’s party.

During the last recession, the UK economy suffered five straight quarters of contraction starting in the third quarter of 1990 as home values plummeted 13% in three years and unemployment almost doubled to 9.9% in April 2003.

The Pound has weakened as the outlook for growth deteriorates and the UK currency looks set to extend its 7% depreciation against the Dollar amid speculation of how long and severe the economic slump will prove to be.

The renewed optimism surrounding the Euro suffered a blow yesterday as the single currency declined against the Dollar following reports that European retail sales plunged for a third consecutive month in August.

The EC sentiment index showed that the prospect of a recession eroded consumer confidence in the region and the recent tone of economic data suggests that the economy is highly unlikely to recover from the slump in the second quarter.

However, the European Central Bank have maintained a hawkish stance on monetary policy and with inflation more than double the Central Bank’s target, policy maker Axel Weber though it necessary to remind the market there is no scope to lower interest rates.

The Dollar bounced back against the Dollar yesterday and also made further gains versus the Pound following reports that the U.S economy unexpectedly grew in the second quarter after crude oil prices dropped $2 on the session.

Oil prices fell after the International Energy Agency released a statement that said it would tap strategic stockpiles should a tropical storm hit production in the Gulf of Mexico and prices have now fallen 22% since touching a record high of $147.67 a barrel on July 11th.

A report from the Commerce Department showed that the U.S economy expanded at an annual pace of 3.3% in the three months to June helped by an increase in exports but the expansion is unlikely to last in the second half of the year as house prices continue to decline.

Data Released 29th August

EU 10:00 Harmonised Index Of Consumer Prices (Flash – August)

EU 10:00 Unemployment (July)

U.S 13:30 Personal Income (July)
- Spending
- Core PCE

U.S 14:45 Chicago PMI (August)

U.S 14:55 Michigan Sentiment (August – Final)

written by Adam Solomon

The Pound declined to the lowest level in almost three months against the Euro yesterday, dropping through the support at 1.2500 by the close of trading last night, amid speculation that the escalating slump in the housing sector will force the Bank of England to cut interest rates.

The UK currency also plunged to a near two-year low against the Dollar following reports that Taylor Wimpey Plc, Britain’s largest homebuilder, posted a loss of £1.4 billion in the first six months of 2008 and added to concerns that the economy is hurtling towards a recession.

The slowdown in activity has forced many home builders, including Taylor Wimpey, to shed jobs and helped pushed unemployment higher as the economy grinds to a standstill following the most widespread slump in housing for 30-years.

The Pound has fallen to the lowest level since June 9th versus the Euro and is headed for the biggest monthly loss against the Dollar since October 1992 as the focus this morning switches to the Nationwide Housing index and the report is expected to confirm that prices slipped for a ninth month.

The Euro rallied against the Pound yesterday and also registered gains versus the Dollar after ECB governing council member Axel Weber rejected any calls for a “premature” reduction in interest rates while crude oil prices increased for a second day on concerns of a Tropical Storm approaching the Gulf of Mexico.

In an interview with Journalists yesterday, Weber said that there is no room for a cut in borrowing costs in the short-term and insisted that policy makers would need to raise interest rates once the economy recovers a state of contraction.

The preliminary reports indicate that European economic growth slipped into negative territory in the second quarter and the gloomy tone of recent data suggests that growth may not recover in the third, which would bring about Europe’s first recession since the Euro’s introduction in 1999.
Nevertheless, the ECB has maintained a relentlessly hawkish stance on monetary policy and Weber’s comments yesterday show that policy makers are still very focused on fighting inflation even at the risk of an economic slump.

The Euro’s resolve will surely be tested this morning as the EC sentiment index is expected to confirm that growth in services and manufacturing slipped deeper into negative territory this month while the M3 money supply index may show that inflationary pressures eased in July.

The Dollar’s momentum against the Pound shows few signs of slowing as the U.S currency briefly dipped under 1.8300 by the close of trading last night after orders for U.S durable goods unexpectedly rose in July.

The report from the Commerce Department showed that orders increased 1.3% to match the previous month’s rise as demand from abroad boosted exports and helped companies cope with a slump in U.S consumer spending.

Data Released 28th August

U.K 07:00 Nationwide House Price Survey (August)

GER 09:00 Unemployment (August)

EU 09:00 M3 Money Supply (July)

- 3 Month Moving Average

EU 10:00 EU Economic Sentiment (August)

- Consumer / Industrial / Services

EU 10:00 Business Climate Index (August)

U.K 11:00 CBI Distributive Trade Survey (August)

U.S 13:30 Gross Domestic Product (Q2 – 2nd Estimate)

- Deflator

U.S 13:30 Weekly Jobless Claims (w/e 23rd August)

written by Adam Solomon

The Pound slipped below 1.8400 against the Dollar last night and the UK currency looks poised for a further dip towards the support at 1.8300 amid speculation of U.S interest rate increase over the coming months.

The Pound also remained subdued against the Euro yesterday and also registered losses versus a basket of currencies as a report from the British Bankers’ Association showed that mortgage approvals held close to the lowest level in at least eleven years last month.

UK banks granted 22,448 loans for home purchases in July, down 65% from the second quarter in 2007, as property values slumped and tighter lending conditions made it difficult for consumers to acquire credit.

The reading is slightly up from the previous month as loans plunged to the lowest level since records began in 1997 but it would be incredibly optimistic to believe that the slump in the property market has peaked.

The Deputy Governor of the Bank of England, Charles Bean, said in a statement just last week that the credit crunch will “drag on for some considerable time” while the director of statistics at the BAA said yesterday that “overall approval activity will remain low.”

The Pound subsequently extended its decline against the Dollar, falling to a low of $1.8337 in the aftermath of the report amid speculation that UK banks will continue to curb lending while credit losses linked to the collapse of the U.S subprime mortgage market will climb above £250 billion.

The credit crunch combined with the fastest pace of consumer price inflation in more than 10-years has brought the UK economic growth to a standstill in the second quarter and all but erased support for Gordon Brown’s Labour Government as he pledges to unveil new measures to revive the economy.

The Euro remained relatively unchanged versus the Pound yesterday but the single currency struggled to cling on to the previous day’s gains made against the Dollar after the Ifo sentiment index showed that German business and consumer confidence fell more than initial forecasts.

The Munich based survey dropped to the lowest level in three years while the Gfk gauge of consumer confidence slumped to a five year low and the reports combined provide a gloomy outlook for Europe’s largest economy as growth slips closer towards contraction.

Oil prices have retreated from a record $147.27 a barrel but they are still up 60% over the past 12 months and that is hurting business confidence as companies shed jobs while a global slowdown is crimping demand for European exports.

The Dollar rose to a fresh six month high against the Euro yesterday also rally to the highest level in 22 months versus the Pound amid speculation that a global economic slowdown will tempt investors back to the greenback.

In terms of economic data, the Dollar also found support after a gauge of U.S consumer confidence improved for a second consecutive month in August after petrol prices retreated and the slump in property values eased.

The Conference Board’s index rose to a reading of 56.9, higher than initial forecasts, while house prices in 20 major cities fell at a slower pace for the fourth straight month in June as new home sales reached a three month high last month.

Elsewhere, the Dollar also found support following the publication of the Minutes from the Federal Reserve’s last meeting where policy makers agreed that there next change in interest rates will be to raise them.

Data Released 27th August

GER 07:00 Import Prices (July)

U.S 13:30 Durable Goods Orders (July)

written by Adam Solomon

Following on from last week, the Pound revisited the significant support level at 1.2500 versus the Euro while the UK currency also recorded a fresh 22-month low against the U.S Dollar amid suggestions that the economy is edging closer towards a recession while projected drop in consumer prices will lead to an interest rate cut over the coming months.

Reports on Friday showed that the UK economy failed to expand in the second quarter while retail sales rose by the weakest annual rate in 17-months after house prices slumped and Bank’s tightened lending.

The Pound has fallen more than 7% in value against the Dollar since July 11th and the UK currency may extend its decline to $1.8300 in the build up to the next BoE rate announcement after the market closed below the so called Fibonacci support level on Friday at $1.8620.

The level represents a 61.8% retracement of the Pound’s rally from the low of $170.49 in November 2005 to the high of $2.1161 in November 2007, based on a series of numbers known as the “Fibonacci Sequence”.

Despite the unexpected surge in oil prices over the past couple of trading sessions and speculation that the Pound’s dramatic downside move has been too rapid to sustain, a number of key indicators suggests that Sterling could retreat all the way to 1.8300 over the next two weeks.

In terms of economic data, the Pound is unlikely to find much support this week as the Market Holiday on Monday means that economists will have to wait until Thursday for the first UK release as the Nationwide House Price survey is expected to highlight the escalating slump in the market.

The Dollar rose for a second consecutive day against the Euro yesterday and also rose to a new high of 1.8409 versus the Pound amid speculation that a 30% drop in oil prices will help bring the U.S economy back from the brink of a recession.

The Dollar also made gains against the majority of the major currencies after the biggest decline in crude costs in over three years while the Chairman of the Federal Reserve, Ben Bernanke, said that policy makers must act should inflation remain high “in the medium term”

Data Released 26th August

GER 09:00 Ifo Index (August)

U.S 14:00 Case Shiller House Price Index (June)
U.S 15:00 Consumer Confidence (August)
U.S 15:00 New Home Sales (July)
U.S 15:00 Richmond Fed Index (August)
U.S 19:00 Minutes of Fed Meeting (August 5th)

written by Adam Solomon

The Pound fell against the Euro yesterday after a report from the Office of National Statistics showed that UK retail sales rose by the weakest annual rate in 17 months, strengthening the case for a reduction in borrowing costs.

The UK currency staged a brief rally against the majors in the aftermath of the report as sales actually increased unexpectedly on the month in July but the gain was the smallest since February 2006 and provides the latest indication that the economy is edging closer towards a recession.

Sales increased just 0.8% last month after falling 4.3% in June, which was the biggest monthly drop since records began in 1986, and the report coincides with recent comments from the BoE Governor, Mervyn King, who admitted that the UK economy faces a “difficult and painful” adjustment in the months ahead.

The negative sentiment surrounding the outlook for UK economic growth has seen the Pound decline 7% against the Dollar in little over a month but the unexpected increase in crude oil prices brought the rate back above $1.8700 by the close last night.

The focus this morning will fall on the second estimate for gross domestic product in the second quarter and the index is expected to show that growth forecasts were revised lower in the three months through June.

Oil for delivery in October rose $5.62 in New York to settle at £121.18 a barrel last night, the biggest intraday move since June 6th after news broke of a missile shield agreement between the U.S and Poland stoked concerns that Russia may cut supply.

The Dollar subsequently declined by the most against the Euro since June and also registered sharp losses versus a basket of currencies, including the Pound, amid speculation that further losses in the U.S financial sector and an increase in oil prices will prolong the U.S slowdown.

The Dollar fell 1% against the Euro on session yesterday as a separate report showed that the Conference Board’s index of leading economic indicators fell 0.7% in July and the tone of report shows that the economy will continue to struggle in the second half of the year.

The worst slump in housing for almost 20-years is showing few signs of abating while the worsening labour market conditions has seen jobless claims rise and a separate report yesterday showed that manufacturing in the Philadelphia region shrank for a ninth straight month.
Data Released 22nd August

U.K 09:30 Gross Domestic Product (Q2 2nd estimate)

EU 09:00 Current Account (June)
EU 10:00 Industrial Orders (June)

written by Adam Solomon

The Pound continued its slide against the Dollar yesterday and also remained under pressure versus the Euro following the release of the minutes from the Bank of England’s last policy meeting, which showed that the MPC was again split three ways on UK interest rates.

The Governor of the BoE, Mervyn King, along with six other members of the Monetary Policy Committee voted to keep interest rates on hold at 5.0% in August with Timothy Besley again arguing for a “pre-emptive” increase and David Blanchflower favouring a cut to prevent a recession.

The result of the two day meeting was the same as the previous month but the Bank of England has since cut UK growth forecasts while Timothy Besley has said that inflationary pressures will ease over the next year as consumer prices fall sharply lower.

In a statement last week, King also said that the economy faces a “difficult and painful adjustment” over the coming months with growth heading for its first contraction since the early 1990s while inflation has accelerated to more than double the Bank’s target over the past month.
In the aftermath of the minutes, the Pound fell back below 1.8600 versus the Dollar and close to the lowest level in nearly two years as the accompanying statement showed that policy makers had judged that inflation risks “ probably eased a little” over the past month.

The UK currency also fell for a third consecutive day against the Euro as a separate industry report showed that factory orders slumped to the lowest level in five months while traders increased bets of a rate cut as the economy drifts closer towards a recession.

The Euro again took advantage of broad Sterling weakness yesterday but the single currency fell close to a six month low against the Dollar amid reports that Germany’s economic outlook deteriorated in the third quarter.

The German Economy Ministry said yesterday that the outlook for growth has slumped beyond even the second quarter numbers when gross domestic product shrank for the first time in four years.

The Euro has fallen 8% in value against the Dollar this month and the market has been waiting for an aggressive correction that has so far failed to materialise as the pessimism surrounding the outlook for Europe has led to speculation that the Dollar will continue its momentum.
Data Released 21st August

U.K 09:30 Retail Sales (July)

EU 09:00 Flash Composite PMI (August)

- Manufacturing PMI
- Services PMI
U.S 13:30 Initial Jobless Claims (w/e 16th August)

U.S 15:00 Leading Indicators (July)

U.S 15:00 Philly Fed Index (August)

written by Adam Solomon

The Pound resumed its downward momentum against the Dollar yesterday and also recorded losses versus the Euro after Bank of England policy maker Timothy Besley, who was the sole voice for an increase in UK interest rates last month, said that inflation will retreat by the end of next year.

The Pound has extended its longest losing streak against the Dollar in more than 37-years as Besley’s statement comes in the build up to the release this morning of the minutes from the Bank of England’s last policy meeting.

The Monetary Policy Committee have voted collectively to keep interest rates unchanged at 5.0% but the July minutes showed an element of division that exists within the BoE as David Blanchflower voted to cut and Timothy Besley voted for an increase.

However, his comments in the Sun newspaper yesterday portray a rather different stance and the Pound will come under further pressure tomorrow if the minutes show that Besley withdrew his recommendation for a rate increase in August.

The Pound lost 3.0% in value against the Dollar last week, its biggest five-day loss since the period through July 1st 2005 as deepening slump in the UK property market will exacerbate an economic slowdown as the economy stutters towards a recession.

The Euro registered gains against the both the Pound and the Dollar yesterday as German investor confidence unexpectedly increased by more than initial forecasts in August as the Euro’s decline helped export demand while oil prices retreated over 30% in little over a month.

The ZEW Centre for European Economic Research said its index of investor and analyst expectations rose to minus 55.5 from minus 63.9 in July, which was the lowest level since the survey began in 1991. The report provides some optimism that the 24% fall in oil prices will leave companies and consumers with more money to spend.

Elsewhere, a separate report in Germany showed that producer prices accelerated to 8.9% in July, the fastest pace since October 1981, which reinforces the ECB’S concerns over inflation and provides policy makers with the premise to keep interest rates on hold at a six year high.

The Dollar fell from a six month high verses the Euro and by the close of trading last night the U.S currency had relinquished earlier gains made against the Pound as stocks fell and oil prices rose amid concerns fuel supplies.

The Dollar has gained 7.8% versus the Euro since touching an all time low of $1.6038 on July 15th and many economists have commented that the degree of the move has been too quick to sustain while the recent tone of economic reports has hardly suggested that the economy is through the worst of the credit crunch.

Data Released 20th August

U.K 09:30 PSNCR (July)

U.K 09:30 Bank of England MPC Minutes (6/7 August)
- Agents Report

U.K 11:00 CBI Industrial Trends – Orders (August)

written by Adam Solomon

The Pound struggled to break above 1.2700 versus the Euro yesterday while the UK currency also consolidated near a two year low against the Dollar after a report from Rightmove Plc showed that house prices slumped to record the biggest annual decline since the survey began in 2002.

The average asking price for a home in Britain declined 4.8% in August from this stage in 2007 to record the biggest annual drop since the survey began measuring home values six years ago.

The impact of the credit crisis has forced banks to impose tighter lending restrictions while the escalating threat of a recession has seen consumers rein in spending as prices hit decade highs and home values slump by the most in almost 20-years.

The Governor of the Bank of England, Mervyn King, said just last week that current housing slump is likely to extend well into 2009 with the market facing “a significant adjustment” as banks withdraw their best offers and maintain higher mortgage rates.

UK banks and lenders are reluctant to release home loans after more than £250 billion in losses and writedowns linked to the collapse of the U.S subprime mortgage market as approvals dropped to the lowest level since at least 1999 in June.

The downturn in housing has exacerbated the economic slowdown as growth in services and manufacturing fall into negative territory while unemployment has risen by the most in 16-years.

The looming threat of a recession and speculation of a UK interest cut has driven the Pound 7% lower against the Dollar in past month and despite a likely period of technical consolidation, the UK currency looks poised to fall further as we build up to the release of the minutes from the Bank of England on Wednesday.

The dwindling sentiment surrounding the outlook for the European economy continued yesterday amid reports that the trade deficit widened to the biggest margin in almost two years in June as imports rose twice as fast as exports.

The Euro subsequently declined against the Pound while the focus this morning will switch to the ZEW survey for investor confidence in Germany and the report is likely emphasise the declining expectations in Europe’s largest economy.

The recent negative tone of European economic data suggests that growth will slip into contraction over the coming months but the ECB are unlikely to relent in their staunchly hawkish stance on inflation as consumer prices threaten to spiral out of control.

A separate report in Germany this morning is expected to highlight the persistent risks to price stability as the producer price index is expected to increase to 7.5% year on year in July after commodity prices hit record highs over the same period.

The Dollar fell from a six-month high against the Euro yesterday and dropped versus the majority of the higher yielding currencies amid speculation that the U.S currency has risen too quickly to sustain its momentum.

Nevertheless, oil prices retreated yesterday amid reports that Hurricane Fay will miss refineries and platforms in the Gulf and Mexico, which account for a fifth of U.S oil production.

The Dollar has increased significantly against all of the 16 most actively traded currencies in August on speculation that central banks around the world will lower interest rates as economic growth stalls and commodity prices fall from record levels.

Data Released 19th August

GER 07:00 Producer Price Index (July)

GER 10:00 ZEW Expectations Balance (August)
- Current Expectations

U.S 13:30 Housing Starts (July)

- Permits
U.S 13:30 Producer Price Index (July)

- Core PPI

written by Adam Solomon

Following on from last week, the Pound declined for eleven consecutive trading days against the Dollar to record the longest run of losses in at least 37-years amid speculation that an impending recession will force the Bank of England to cut interest rates from the current 5.0%.

The UK currency posted its fourth weekly drop and also recorded sharp losses against a basket of currencies after the Bank’s quarterly inflation report showed that policy makers have revised down UK economic growth forecasts while unemployment climbed by the most in 16-years.

The accompanying statement from the BoE Governor, Mervyn King, acknowledged that the economic climate is likely to worsen as tourism and tax revenue fall while the broad impact of the credit crisis and a declining labour market will curtail the pace of consumer spending.

The Pound has tumbled roughly 6% in value against the Dollar since July 31st and the scale of the moves in such a short space of time means that a technical bounce is likely but the negative sentiment surrounding the outlook for UK interest rates may result in a short period of consolidation before a further downward move.

Nevertheless, the Bank of England have a dual mandate in balancing the risks to growth against accelerating inflationary pressures and the Pound should find some support on Wednesday providing the minutes reflect concerns over rising consumer prices.

The annual pace of UK consumer price inflation has accelerated to a decade high at 4.4% and more than double the Bank’s 2.0% target as record high food and energy costs force manufacturers to pass on higher costs to the consumer while an increase in the cost of living will prompt higher wage demands.

At least two members of the BoE’s monetary policy committee have expressed concerns over the threat of inflation and a three way split in the voting pattern would signal a reduction in borrowing costs will not be forthcoming in the short-term, which may help the Pound rally from a near two year low versus the Dollar.

The Euro slumped against the majority of the major currencies last week, extending its collapse to 1.4660 versus the Dollar while the single currency also recorded losses against a weak Pound after economists priced in nearly 40 basis points worth of rate cuts over the next year.

The weakening tone of economic reports has indicated that the European economy is far from immune to a U.S led global slowdown and despite the ECB’s relentlessly hawkish stance on policy, the Euro is struggling amid suggestions that the economy will contract in the second quarter.

The economic calendar in the Euro-region is light this week but the focus will shift to the German ZEW survey for investor confidence where the headline index is expected to improve modestly in August.

The Dollar’s dramatic upside move has seen the U.S currency rocket to a six month high against the Euro and extend its rally to five weeks versus the Pound, the longest winning streak to February 2006.

In addition, the overwhelming decline in commodity prices has seen traders move back into the Dollar as a hedge against inflation as the increased appetite for risk aversion saw many of the high yielding currencies struggle to make gains.

Data Released 18th August

U.K 00:01 Rightmove House Price Survey (August)

EU 10:00 Trade Balance (June)

U.S 18:00 NAHB - Home Builders Survey

written by Adam Solomon

The overwhelming decline in Sterling sentiment continued yesterday as the UK currency plunged to a fresh 22-month low against the Dollar, falling through the support at 1.8836 to a low of 1.8646 by the close of the European session following the release of the Bank of England’s quarterly inflation report.

The Pound also recorded heavy losses against all of the 16-most actively traded currencies after the Central Bank cut its forecast for UK economic growth as unemployment rose by the most in almost 16-years.

Claims for jobless benefits increased by a staggering 20,100 in July to 864,700, the biggest increase since December 1992, as the report illustrated the impact of the credit crisis on the labour market as rising unemployment will curtail consumer spending and exacerbate the worst housing slowdown in 18-years.

The Governor of the BoE, Mervyn King also said that the annual pace of inflation, which currently stands at a decade high of 4.4%, will fall below the government’s 2.0% target in two years as long as policy makers keep interest rates steady at 5.0%.

Nevertheless, the Pound declined significantly in the aftermath of the report, falling under 1.2600 versus the Euro, while also falling under $2.00 against the Canadian Dollar as traders largely ignored King’s comments and focused on the downward revisions to economic growth.

The UK economy is forecasted to grow roughly 0.1% on a year-on-year basis in the first quarter of 2009 and that’s compared with a previous estimate of 1.0% and King conceded that “broadly flat output means there is a possibility of a quarter or two of negative growth.”

Sellers of Sterling have suffered a great loss in a very short space of time and the projections for a recovery in sentiment is weak as traders speculate on the timing of an interest rate reduction as the economy spirals towards contraction.

The Euro again took advantage of broad Sterling weakness yesterday but the single currency has been unable to break above $1.50 versus the Dollar after European industrial production remained unchanged in June after by the most in 16-years last month.

Manufacturing in the in the Euro-zone fell 0.5% from this stage in 2007 as the region’s economy stutters to the worst performance since the introduction of the Euro in 1999 and the report is just the latest indication that growth will slip into negative territory.

Nevertheless, the European Central Bank have maintained a hawkish stance on inflation and policy makers have frequently highlighted the inherent risks to price stability, which means that the governing council will probably hold interest rates at the highest level in seven years, at least for the time being.

The focus this morning will fall on the harmonised index of European consumer prices and the report is expected to confirm that inflation edged higher to 4.1% in the final estimate for July but the Euro may struggle with growth expected to slip to 1.5% in the second quarter.

The renewed optimism surrounding Dollar continued as the U.S currency made further gains against the majors yesterday despite the increase in crude oil prices and reports that U.S retail sales declined for the first time in five months.

Data Released 14th August

EU 09:00 ECB Monthly Bulletin Published
EU 10:00 Gross Domestic Product (Q – Flash Estimate)
EU 10:00 Harmonised Consumer Price Index (July – Final)

U.S 13:30 Consumer Price Index (July)
- Core CPI
U.S 13:30 Initial Jobless Claims (w/e 8th August)

written by Adam Solomon

The Pound plunged against the Dollar yesterday, dropping through the lowest level in 21 months while the UK currency also registered sharp intraday losses versus the Euro after an industry report from the Royal Institution of Chartered Surveyors showed a further slump in U.K house prices.

The credit crunch has brought the housing market to a virtual standstill while the escalating threat of a recession has seen the Pound fall under 1.9000 versus the Dollar for the first time in nearly two years as speculation of a UK interest rate cut continues to weigh on sentiment.

Although the recent trend of weakening economic data continues to dominate, a separate report from the Office of National Statistics yesterday showed that UK inflation accelerated to well in excess of initial estimates, rising to 4.4% year on year in July.

The annual pace of consumer prices breached the government’s upper 3% limit for the third consecutive month and rose to the highest level since comparable records began in 1986 while the report also showed that prices exceeded initial forecasts and posed a greater dilemma to policy makers.

The dwindling sentiment surrounding the Pound is likely to continue over the coming weeks and the focus this morning will fall on the UK claimant count with the unemployment rate expected to increase to 5.3% and highlight the worsening labour market conditions that will contribute to an economic slump.

Elsewhere, the Bank of England’s quarterly inflation report is expected to mirror the tone of the CPI numbers yesterday but the probability of a rate increase is remote as policy makers address the current risks to growth and prepare to lower borrowing costs significantly over the next year.

The Dollar failed to extend its upside momentum against the Euro yesterday, snapping five successive days of gains amid suggestions that the U.S currency’s 4.6% appreciation has happened too fast to sustain the move.

The escalating decline in oil prices was enough to see the Dollar continue to make gains versus the struggling Pound and a report on the U.S trade balance also provided some optimism on the future outlook for the economy.

The gap in goods and services unexpectedly narrowed in June as the biggest jump in exports in over four years offset the record jump in fuel imports in May with the deficit shrinking 4.1% in June.

Data Released 13th August

U.K 00:30 RICS House Price Survey (August)

U.K 09:30 Claimant Count / Unemployment Rate (July)

- Unemployment Rate ILP Basis
- Average Earnings (June)

U.K 10:30 BoE Quarterly Inflation Report (August)

EU 10:00 Industrial Production (June)

U.S 13:30 Retail Sales (July)

- Core Retail Sales

U.S 13:30 Import Prices (July)

- Export Prices (July)

U.S 15:00 Business Inventories (June)

written by Adam Solomon

The Pound extended its decline against the Dollar yesterday, dropping to a low of 1.9069 by the close of the European session, but the UK currency again took advantage of broad Euro weakness to break above 1.2800 for the first time since May.

The looming threat of a recession has been graphically highlighted in the recent downturn in UK economic data but the Bank of England has a dual mandate of managing the economy against the upside risks to price stability.

A report from the Office of National Statistics yesterday showed that UK producer prices increased in July at the fastest pace since records began in 1986 and forced policy makers to wait before cutting interest rates even at the risk of an economic slump.

UK factories have been forced to pass on higher costs to the consumer as prices rose 10.2% from this stage in 2007, compared with 10% the previous month, but the report was slightly below initial forecasts and provides some optimism that the recent downturn on commodity prices will filter through to the broader economy.

Nevertheless, the Governor of the Bank of England, Mervyn King, has predicted that record high food and oil prices will double the 2.0% target over the coming months while the economic growth will probably slip into negative territory.

Policy makers are also concerned about second round effects as workers seek higher wages to compensate for the higher cost of living and therefore the MPC decided to keep the main interest rate on hold at 5.0%.

The Pound was little changed against the Dollar in the aftermath of the report but the UK currency lost further ground against the greenback as the unrelenting decline in commodity prices helped boost sentiment for the Dollar.

The focus today will fall on the release of the July consumer price index, which is expected to mirror the tone of the PPI report yesterday and show that the broader measure of inflation accelerated to 4.1% in last month, more than double the government’s yearly target.

The Dollar advanced to the highest level in nearly six months versus the ailing Euro yesterday and also recorded sharp gains versus the Pound amid suggestions that a further drop in commodity prices will continue to boost growth and bring the economy back from the brink of recession.

Concerns that the U.S slowdown is spreading to Europe has prompted investors to reduce holdings of higher yielding assets such as the Pound, Australian Dollar, New Zealand Dollar and pay back low cost loans in Japan and Switzerland as the worsening economic climate brings an increasing element of risk to the market.

The Dollar has subsequently rallied to $1.4899 against the Euro, the highest level since February 26th and further gains are likely as crude oil plunged to a 14-week low amid signs that the U.S economic slump will extend into 2009 and weaken demand for fuel.

Data Released 12th August

U.K 00:01 BRC Retail Sales Survey (July)

U.K 09:30 Consumer Price Inflation (July)

- Retail Price Index

U.S 13:30 International Trade Balance (June)

U.S 18:00 Federal Budget Statement (July)

written by Adam Solomon

Following on from last week, the Pound slipped to the lowest level in almost two years versus the Dollar amid concerns that the economy is heading towards a recession while UK banks repossessed the highest number of homes in 12-years in the first half of 2008.

The UK currency declined for a sixth consecutive day against the Dollar on Friday, falling below $1.9200 for the first time since March 2007 as the move correlated with reports that the number of foreclosures jumped 41% from the previous six months as tighter credit conditions and rising prices left consumers unable to maintain mortgage repayments.

Consumer price inflation has almost doubled the government’s 2.0% target but the recent deterioration in the outlook for the UK economy convinced policy makers to keep interest rates unchanged at 5.0% last Thursday.

The Pound fell to a low of $1.9146 versus the Dollar, the lowest since November 23rd 2006, while the UK currency slumped the most in a week since July 2005 amid speculation that the Bank of England will cut interest rates by 50 basis points over the next 12 months.

The overwhelming decline in Sterling sentiment has led many economists to predict that Cable will be under $1.8500 by the turn of the year as further deterioration in the housing market combined with contraction in services and manufacturing will mean that policy makers have little to choice but to reduce borrowing costs and provide some relief to the financial sector.

Nevertheless, the Pound has broken higher against the Euro, closing above the long-standing resistance level at 1.2760 versus the single currency as the dovish tone of the ECB’s accompanying statement increased speculation that policy makers will relent and cut interest rates before the turn of the year.

Considering the weakening sentiment surrounding the UK economy and the outlook for monetary policy, Euro buyers would be well placed to take advantage of this rate or at least a stop order around 1.2700 as we build up to a busy week of economic data.

The focus this morning will fall on the release of the UK producer price index and the report is expected to confirm that prices increased modestly in July, which correlates with commodity prices reaching the highest level on record.

The overwhelming rebound in Dollar sentiment is hardly surprising considering the dramatic slump in commodity prices as crude oil touched a low of $115 a barrel in New York while inventories increased beyond initial forecasts and demand in the U.S weakened.

The Dollar’s resolve will surely be tested this week as government report is expected to highlight that retail sales dropped in July for the first time in five months as record high food and fuel costs sapped spending.

Data Released 11th July

U.K 09:30 Producer Price Index (July)
- Input
- Output

U.K 09:30 Industrial Trade Balance (June)
- Non EU Trade Balance (June)

written by Adam Solomon

The Pound rose higher against both the Euro and the struggling Canadian Dollar yesterday despite reports that UK consumer confidence in the economy fell by the most in at least four years last month amid falling home values, rising unemployment and faster inflation.

The index published by the Nationwide Building Society showed that sentiment is at the lowest level since records began in 2004 and the negative tone of the report is just the latest in a series of weak economic data that indicates the economy is hurtling towards as a recession.

The UK economy has grown just 0.1% in the second quarter, the slowest pace in at least three years, and it seems only a matter of time before growth slips into negative territory and the Pound has been struggling on speculation that the Bank of England will need to intervene and cut interest rates this lunchtime.

However, at least two members of the MPC believe that rising inflationary pressures are the chief concern to the economy with Andrew Sentence and Timothy Beasley acknowledging that consumer prices will rise to 4.5% over the coming months.

Therefore, the probability of an interest rate cut is remote and the Pound may rally higher against the majors if policy makers vote to keep interest rates unchanged at 5.0%.

The Canadian Dollar fell to the lowest in a year against its U.S counterpart and registered sharp losses against the majority of the 16 most actively traded currencies after concerns over economic growth as oil prices continued to retreat below $120 a barrel.

Commodities account for roughly half of the nation’s exports while oil prices have plunged over 20% since touching a record high on July 11th. Prices fell further yesterday after a U.S government report showed an unexpected increase in inventories and a surprisingly drop in fuel demand.

The Euro struggled to make gains against the majors yesterday after a report in Germany showed that factory orders unexpectedly fell for a seventh consecutive month in June as record high energy prices hamper business confidence while a strong Euro hampered exports and pushed up production costs.

The unprecedented decline in the outlook for the Euro-zone economy means that growth probably contracted in the second quarter and the ECB may be forced to cut interest rates despite inflation rising to the highest level in 16 years.

The focus today will inevitably fall on the ECB interest rate announcement and accompanying press conference at midday and despite concerns over a recession, the governing council members will probably leave interest rate unchanged at 4.25%.

The tone and language used in the accompanying statement will be heavily scrutinized as traders attempt to gauge the Central Bank’s next move on monetary policy and will be interesting to see if Trichet continues to maintain a hawkish stance on inflation.

The positive momentum surrounding the Dollar continued yesterday as the sharp drop in commodity prices helped boost sentiment while the U.S currency consolidated under 1.9500 versus the Pound despite reports that the Fed will leave interest rates at 2.0% for the remainder of the year.

Elsewhere, the Dollar also shrugged of reports that the struggling U.S mortgage-finance company, Freddie Mac, slashed its dividend by more than 80% after posting a loss in the second quarter that was three times more than initial forecasts.

Data Released 7th August

U.K 12:00 BoE Rate Announcement

EU 12:45 ECB Rate Announcement
EU 13:30 ECB Press Conference

GER 11:00 Industrial Production (June)

U.S 13:30 Initial Jobless Claims (w/e 02 Aug)
U.S 15:00 Pending Home Sales (June)
U.S 20:00 Consumer Credit (June)

written by Adam Solomon

The Pound continued to decline against the Dollar yesterday, dropping to the lowest level in seven weeks, as UK industrial production slumped for the fourth consecutive month and increased speculation surrounding the probability of an interest rate cut.

According to the report from the Office of National Statistics, factory output fell 0.5% in June despite initial forecasts of a 0.1% increase and the Pound also succumbed to a report on the UK service sector.

An index of business confidence showed that growth in UK service industries remained in negative territory for the fourth straight month and the reports combined show that the credit crisis, falling home values and record energy prices has brought the economy to the brink of recession.

The Pound fell towards the support at 1.9500 versus the Dollar and briefly traded under 1.2600 versus the Euro as the speculation surrounding the BoE interest rate announcement continues to weigh on Sterling sentiment.

The monetary policy committee probably won’t cut interest rates this month after two members of the nine-strong panel reiterated their concerns over rising inflation but the worsening economic outlook means that policy makers may have little choice but to reduce borrowing costs over the coming months.

The Chancellor of the Exchequer, Alistair Darling, felt the need to state the blindingly obvious in an interview with Radio 4 yesterday when he said that “we are going through a tough time that is likely to continue for a while”.

Nevertheless, the Chancellor also highlighted that the Bank of England face the unenviable task of balancing slowing economic growth against the fastest pace of inflation in eleven years and his comments come in the aftermath of reports that HSBC Holdings Plc first half profits declined 29% in losses linked to U.S subprime mortgages.

The Euro declined against the Dollar yesterday as oil prices continued to retreat and European retail sales plunged by the most in at least 13-years in June as record high fuel and food costs left consumers with less disposable income.

Sales in the 15 nations that share the Euro fell 3.1% from this stage in 2007, the largest annual decline since records began in 1995, and was more than double the 1.3% drop anticipated as the Euro-zone economy drifters closer towards contraction.

The renewed appetite for the Dollar continued yesterday as the U.S currency continued to make gains versus the majors after crude oil prices closed below $120 a barrel for the first time in three months amid reports that demand may be affected by a global economic slowdown.

Prices dropped 2.8% in the sessions after growth in U.S and U.K service industries contracted last month while the larger than expected drop in European retail sales means that the economy may slip into a recession in the third quarter.

Oil has dropped over $28 since achieving a record high of $147.27 a barrel on July 11th as record high fuel costs encouraged consumers to rein in spending while traders continue to move away from commodities as a hedge against inflation.

Despite the reported drop in U.S service sector growth, the Federal Reserve elected to keep interest rates at 2.0% last night and indicated that a declining labour market and concerns over the financial sector will delay any increase in borrowing costs.

Data Released 6th August

GER 11:00 Industrial Orders

written by Adam Solomon

The Pound plummeted to a six week low against the Dollar yesterday while the UK currency also declined against the majority of the major currencies, dropping to a low of 1.2589 versus the Euro after a report from HSBC Holdings Plc posted the steepest earnings decline since 2001.

Net income for the first half of the year dropped 29% from this stage in 2007 while shares in HSBC fell 1.1% after the Chairman, Stephen Green, said that the economic outlook is deteriorating, rekindling the concern over the state of the financial sector.

Elsewhere, the Pound also succumbed to report from the Chartered Institute of Purchasing and Supply, which showed that growth in the construction sector shrank at the fastest pace in eleven years last month.

The UK building industry accounts for roughly 6% of gross domestic product and with growth in services, manufacturing and home building falling into negative territory, the probability of a recession has increased significantly over the past month.

The Bank of England’s monetary policy committee convene this Thursday and the Pound is suffering in the build up to the announcement amid speculation that the worsening economic climate will convince policy makers to lower interest rates.

The Euro took advantage of broad Sterling weakness yesterday while the single currency stood firm against a resurgent U.S Dollar after a report on European producer prices increased the probability that ECB policy makers will retain a hawkish stance this week.

The so called gauge of factory-gate inflation showed that prices rose by the most in at least 18-years last month as energy costs continued to soar higher.

Prices have increased 8% from a year ago as factories have little choice to pass on record high raw material costs to the consumer and the index, which was ahead of expectations, rose by the most since records began in 1990.

The Euro’s resolve will be tested this morning as the focus switches back to the declining sentiment spreading through the economy as a government report on the consumer sector is expected to report a 1.2% drop in retail sales.

The Dollar traded through the trend support at 1.9650 versus the Pound yesterday, rising to a six week high by the close of trading last night, after crude oil prices fell below £120 a barrel for the first time in almost three months amid speculation that a tropical storm mill miss offshore refineries.

Oil prices fell as much as $5.60 a barrel on the session despite the continued threats to supply in the Middle East as Iran stand firm on their enrichment policy and ignore calls from Israel and the U.S to suspend the program.

The geo-political issues that have previously pushed the price of crude oil to the highest level on record at $147.60 a barrel are seemingly having little affect on current market conditions as traders move away from commodities as a hedge against inflation.

The focus today will inevitably fall on the FOMC rate decision this evening and the Dollar’s resolve will be tested in the aftermath of the announcement as policy makers are expected to keep interest rates unchanged at 2.0% this month while emphasising the risks to both inflation and economic growth.

Data Released 5th July

U.K 09:30 CIPS Services PMI (July)
U.K 09:30 Industrial Production (June)

- Manufacturing Production

EU 09:00 RBS Services PMI (July)

EU 10:00 Retail Sales (June)

U.S 15:00 ISN Non-Manufacturing (July)
- Business Activity
U.S 19:15 FOMC Rate Decision

written by Adam Solomon

The Pound snapped two days of gains against the Euro yesterday while also plunging to a near three week versus the Dollar after a measure of UK consumer confidence slumped to the lowest level on record.

The Gfk index fell to a reading of minus 39 last month, below the level reached on the eve of the last recession in 1990.

Elsewhere, the Pound also succumbed to reports that house prices declined 1.7% in July as the Nationwide house price index recorded the ninth consecutive drop in home values.

Yet another barrage of weakening economic reports has curtailed Sterling sentiment and fuelled speculation that the UK will slip into a recession.

The recent economic developments led to comments from BoE policy maker, David Blanchflower, who said that the MPC will need to reconsider it's stance on interest rates in next week's meeting.

The Pound may continue to decline against the Dollar today as a report from the Chartered Institute of Purchasing & Supply is expected to confirm that UK manufacturing slipped further into negative territory last month.

The Dollar consolidated just under the month-long high versus the Euro last night while the U.S currency also bounced back against the Pound after a strong intraday slide following report that second quarter GDP grew less than forecasts.

The report from the Commerce Department showed that economic growth increased at an annual rate of 1.9% the three months to June, which fell short of expectations and fuelled speculation that a recession may have already begun in the final months of 2007.

Elsewhere, a separate report showed that U.S labour market conditions are deteriorating as claims for jobless benefits rose to 448,000 last week as the total number of initial filings was the highest since April 2003.

The focus today will fall on the monthly U.S job report and the Dollar may come under some pressure as the economy is expected to have lost 73,000 jobs last month while the unemployment rate increased to 5.6%.

Nevertheless, the Dollar will again be susceptible to commodity price gains as crude oil prices dropped yesterday amid reports that U.S fuel demand weaken further and the Dollar may make further gains if prices fall below $120 a barrel in New York.

Data Released 1st August

U.K 09:30 CIPS Manufacturing PMI (July)

EU 09:00 Manufacturing PMI (July)

U.S 13:30 Non-Farm Payrolls (July)

- Unemployment Rate
- Average Earnings

U.S 15:00 Construction Spending (June)

U.S 15:00 Manufacturing ISM (July)

written Adam Solomon