The revival in global stock markets continued to bolster Sterling sentiment yesterday as the Pound rallied towards the highest level in a week versus the Dollar, while the UK currency also climbed for a third day against the Euro as a cut in U.S interest rates increased the allure of higher-yielding currencies.

The Pound has enjoyed its longest winning streak against the Euro in almost two weeks after UK and U.S stocks rallied higher following the Federal Reserve’s decision to lower borrowing costs by 50 basis points and provided a further $120 billion to spur lending in emerging markets.

U.S interest rates currently stand at just 1.0% with the UK benchmark lending rate at 4.5%, which remains the highest among the Group of Seven nations, and the recent revival in risk appetite is making the Pound a far more attractive commodity for investors.

The UK currency rose a further 1.8% versus the Dollar by the close of trading last night, rising to a high of $1.6672 after posting the biggest two day gain in more than 23 years this week as the UK FTSE 100 index gained for a third consecutive day.

Nevertheless, the Pound is still down over 8% versus the Dollar since the end of September and is poised to record the fourth monthly drop against its U.S counterpart but there are signs that the market has hit a near-term bottom as central banks around the world cut rates and inject liquidity.

In terms of economic data, the Pound shrugged off an earlier report from the Nationwide Building Society, which showed that UK house prices fell by the most since records began in 1991 with the average cost of a home dropping 14.6% from this stage last year.

Home values continue to decline as banks and lenders alike tighten credit conditions, while the probability of the first recession in seventeen years has deterred potential buyers despite the likelihood of a further substantial reduction in borrowing costs.

In a speech to the University of Kent yesterday, Bank of England policy maker David Blanchflower highlighted the necessity for a significant reduction in interest rates saying, “if rates are not cut aggressively we do face the prospect of a relatively deep and long lasting recession”.

Blanchflower has advocated the need to lower interest rates for the past year and the short-term revival in Sterling sentiment may be severely tested in the run up to the next rate announcement on November 6th amid speculation of a 1% cut.

The Monetary Policy Committee have already lowered the benchmark lending rate by half a percentage point in October in a coordinated joint action with six other central banks to stem the crisis even after consumer price inflation accelerated to 5.2% last month.

The rising appetite for high-yielding currencies has sent the Euro rising higher against the Dollar but the single currency continued its downside momentum versus the Pound after an index of European consumer confidence fell to a record level in October.

The escalating financial crisis restricted corporate investment in the region as sentiment plummeted and the index of sentiment dropped more than initial forecasts to register the sharpest fall since the data was first compiled in 1985.

The Euro-zone economy is obviously in the grip of a recession and the Euro may continue to decline against the majority of the majors as a report this morning is expected to show consumer prices retreated in October, which correlates with the vast decline in oil prices over the past three months.

The rise in stocks, commodities and equity markets over the past week has curtailed the Dollar’s momentum and the greenback failed to find any support yesterday following reports that the U.S economy suffered its biggest decline since 2001 in the third quarter.

Gross domestic product contracted 0.3% in the three months through September, raising the prospects of the worst recession in a quarter of a century and therefore boosting the chances of Barack Obama and fellow Democrats in next week’s elections.

According to the report from the Commerce Department, the decline was actually worse than anticipated but the economy may be poised for a larger drop this quarter after the record 20-year expansion in consumer spending came to an abrupt end.

The decline in the Dollar was also exacerbated following comments from the Federal Reserve chairman Ben Bernanke, who signalled yesterday that he’s ready to cut interest rates to the lowest level on record should the Reserve Bank’s actions fail to stem the deepening economic slump.

Data Released 31st October

U.K 10:30 Gfk Consumer Confidence Survey (October)

EU 10:00 Flash Harmonised Consumer Prices (October)

EU 10:00 Unemployment (September)

U.S 12:30 Personal Income / Consumption (September)
- Core PCE

U.S 12:30 Employment Cost Index (Q3)

U.S 13:45 Chicago PMI (October)

U.S 13:55 Michigan Sentiment (October Final)

written by Adam Solomon

The Pound has enjoyed its biggest two-day advance against the Dollar in over 23-years as UK stocks rallied for a second consecutive day yesterday, while a separate report showed that mortgage approvals actually rose for the first time since June 2007.

The UK currency made widespread gains across the board, rising by the most in nearly eight years versus the Euro after a report from the Bank of England showed that lenders approved 1,000 more home loans last month than in August and the FTSE 100 Index surged 7.1% on the session.

UK lenders approved 33,000 loans in total for home purchases in September, up from 32,000 in August, which is still near the lowest level since comparable records began in 1999 but the unexpected increase, however modest, was the catalyst in sending the Pound rising higher against the majority of the majors.

There is an element of risk appetite creeping back into the market as equities and commodities recover earlier losses and although the Pound is headed towards the longest run of declines since February 1993, there are signs that investors are returning to high-yielding currencies as stability returns to the market.

The Chancellor of the Exchequer Alistair Darling said yesterday that the government will pledge extra borrowing to support economic growth as the official figures suggests that the UK economy has entered its first recession since 1992.

The short-term recovery in Sterling sentiment will last as long as risk appetite develops and the Pound jumped 3.4% in value against the Dollar yesterday, rising to a high of 1.6474 in London from just $1.5901 yesterday, bringing its two day gain to 5.6%, the most since September 1985.

The degree of confidence returning to global financial markets was also evident in the Pound’s performance against the Yen and the UK currency continued that momentum yesterday after gaining by the most in 37-years the previous session.

In addition, the Australian and New Zealand Dollar have both made substantial gains against the majors, including the Pound, while the Canadian Dollar has benefited from an increase in the price of crude oil, which increased more than $4 in New York amid speculation that a rate cut would boost fuel demand.

There has been widespread speculation surrounding the Bank of England rate announcement on November 6th and policy makers will probably cut their key interest rate by half a percentage point to 4.0% to match the Fed’s action yesterday evening.

The Monetary Policy Committee have already lowered rates by 50 basis points in a coordinated effort with six other central banks earlier this month in an attempt to stem the financial crisis and provide some confidence to the global banking system.

The shift in sentiment away from an environment of ‘risk aversion’ has also helped the Euro sustain some unlikely momentum against the Dollar but the single currency continued to decline against the Pound, closing just under 1.2700 last night after reaching 1.2756 earlier in the session.

The harmonised index of German consumer prices showed that the annual pace of inflation slowed by more than economists forecasts in October, which correlates with the overwhelming fall in energy prices feeding through to the broader economy.

Oil prices have more than halved since reaching a record high of $147.26 a barrel in July, reducing the risks to the price stability across the Euro-zone and the ECB President Jean-Claude Trichet said this week that the bank may lower borrowing costs again in November.

The inflation rate declined to 2.5% from the 3% in September and the report gives the European Central Bank the scope to lower interest rates from the current levels and help bolster the economy as growth slips deeper into contraction.

The Dollar slumped by the most since 1998 against the majority of the major currencies yesterday and extended that decline after the Federal Reserve cut interest rates to a level matching the lowest in the last 50-years last night.

The Dollar’s perceived safe haven status has sent the U.S currency rising to the highest level in five years versus the Pound this month and a further drop in borrowing costs will make the Dollar an even more attractive commodity to investors if the historic level of volatility surrounding financial markets returns.

Nevertheless, with the appetite for risk slowly creeping back into the market, the Dollar remains under pressure in the short-term as the greenback slumped a further 2.1% versus the Euro and the Fed confirmed that risks to the economy remain the primary concern.

A recovery in U.S stocks combined with a two day jump in oil prices has also hurt Dollar sentiment, while data yesterday showed that U.S durable goods orders fell for a second consecutive month in September as the credit crisis curtailed sales and caused a lack of business investment.

The 1.1% drop in bookings was indeed slightly less than economists forecasts but the slump in manufacturing has worsened in October and the decline in investment will contribute to a contraction in the U.S economy for the second straight quarter.

Data Released 30th October

EU 10:00 EC Business Climate (October)

EC Economic Sentiment (October)

- Consumer / Industrial / Services

U.S 12:30 Gross Domestic Product (Q3 Advance)

- Deflator

U.S 13:30 Initial Jobless Claims (w/e 24th October)

written by Adam Solomon

The Pound bounced back against the Dollar yesterday, snapping a seven day losing streak to breach the $1.6000 level by the close of trading last night, while the UK currency also registered gains versus the Euro after rising equity and commodity markets bolstered demand for Sterling.

A modest revival in the UK stock market saw the FTSE 100 Index jump as much as 4.7% yesterday, while crude oil prices also bounced over 2% higher, and the Pound’s relative strength index signalled that it was poised to rebound versus the Dollar after falling to the lowest level in five years.

The strong correlation between currencies and equities has become all too apparent of late and the gains in equity markets yesterday brought a renewed appetite for risk back into the market as traders bought back into the high yielding currencies amid signs of an economic recovery.

That sentiment was also reflected in the performance of the Japanese Yen yesterday, which declined 4.8% versus the Pound from Monday to record the largest downward move since at least January 1971.

The Pound slumped to a low of $1.5279 on Monday but the UK currency enjoyed a strong intraday surge against the its U.S counterpart, after sliding more than 10% in value in October alone.

The big question is whether the Pound will be able to sustain this momentum beyond the short-term, particularly considering the heightened sense of speculation that the Bank of England will implement a 100 basis point reduction in interest rates next week.

In addition, a recent report from the Office of National Statistics showed that UK economic growth contracted 0.5% in the third quarter as the economy drifts towards the first recession since 1992.

The deputy governor of the Bank of England John Gieve said in a speech yesterday that financial markets are under “acute” strain and the recent falls in equity and corporate bond prices is affecting long-term institutional investors, including hedge funds.

The slump in housing has seen the number of foreclosures jump 71% in the second quarter as higher interest rates made it harder for property owners to pay off their mortgages.

Investors and traders have stepped up bets that the Bank of England will cut its main interest rate on November 6th but the Prime Minister Gordon Brown hinted on Monday that the Central Bank may be forced into another coordinated round of cuts this week.

The Euro struggled to stem the losses against the Dollar yesterday, dropping to the lowest level in more than two years, while the single currency also relinquished earlier gains against the Pound following speculation that the ECB will also cut interest rates as the global credit crisis pushes the economy closer towards contraction.

In addition, the Euro slumped for a third straight day as a report in Germany is expected to confirm that consumer confidence in the region’s largest economy will fall to the weakest level since June 2003 and the ECB President said yesterday that policy makers may cut borrowing costs next week.

Europe’s economy stands on the brink of recession with growth in manufacturing and service industries contracting at a record pace in October, while the Ifo index showed business confidence slumped to a five year low.

Despite making further gains against the Euro, the Dollar succumbed to a revival in global stocks as the Dow Jones Industrial Average recorded its second best point gain in 23 years, which encouraged investors that credit markets are stabilising.

In terms of economic data, U.S consumer confidence dropped to a record low and house prices in 20 U.S cities continued to fall from this stage in 2007, while the focus will switch to the FOMC rate announcement this evening where policy makers are forecast to lower borrowing costs from the current 1.5%.

Data Released 29th October

U.K 09:30 Consumer Credit (September)
U.K 09:30 Mortgage Applications (September)

U.S 12:30 Durable Goods Orders (September)
U.S 18:15 FOMC Rate announcement

written by Adam Solomon

The Pound declined to the lowest level in almost five years against the Dollar yesterday, while the UK currency also slumped to a near all-time low versus the Euro following reports that UK house prices dropped by the most in since records began in 2001 and UK stocks continued the downward momentum built up from last week.

The FTSE 100 Index fell to the lowest level in five years, led by a decline oil service companies and commodities producers, as crude oil prices retreated to the May 2007 low amid concerns that a global recession will slash fuel consumption.

UK stocks lost a further 0.8% on the session after earlier falling as much as 5.6% at the open and the index has now slid 21% so far in October on concerns that a global slowdown will curb corporate profits, while the decline in stocks has coincided with the slump in Sterling, which has now fallen over 12% against the Dollar in October alone.

According to a report from Hometrack Ltd, property prices fell the most in at least seven years this month as the average cost of a home in Britain slipped 7.3% to £163,200 and prices will keep declining over the coming months as the economy deteriorates and edges closer towards a recession.

The seizure in global credit markets has made banks and lenders reluctant to lend and the subsequent reaction on consumer spending saw economic growth slip into negative territory for the second successive quarter in the three months through September, while unemployment has climbed by the most in over two years.

The heightened expectations of a forthcoming recession combined with the rising jobless rate will continue to undermine demand for housing and the London based research group said that ‘continued price falls are inevitable’ over the coming months.

UK house prices are expected to decline by 25% by the end of next year from the highest point in the third quarter of 2007, while the Centre for Economic and Business Research said in a separate statement that prices will come back towards the 2004 levels.

The Pound subsequently fell for the seventh consecutive day against the Dollar, trading at a low of $1.5280 earlier in the session before bouncing back towards $1.5600 at the close of trading last night but the general consensus suggests that a 1% drop in UK interest rates could bring the Pound down to the 1.4000 levels.

The UK economy contracted 0.5% in the third quarter in the official statistics released last week as the decline in housing is accompanied by a downturn in services and manufacturing, while speculation continues to mount that the Bank of England could reduce borrowing costs aggressively on November 6th.

The former chairman of the Financial Services Authority Howard Davies concurred with that sentiment, saying yesterday that the Bank of England may need to consider lowering its benchmark interest rate by a full percentage point as the turmoil sweeping through financial markets shows few signs of abating.

The heightened speculation surrounding the rate announcement has continued to weigh on Sterling sentiment as the Pound declined against 14 out of the 16 most actively traded currencies, while the rising appetite for risk aversion means that the higher yielding currencies will continue to struggle as investors seek the security of the U.S Dollar and Japanese Yen.

BNP Paribas have recently altered their predictions to reflect a 100 basis point reduction and yesterday Goldman Sachs Group Inc also said that the Central Bank will bring borrowing costs down to 3.5% next month in a last ditch attempt to bring some stability and confidence back to the banking system.

The Prime Minister Gordon Brown also weighed into the argument yesterday and said that central banks around the world have the scope to reduce interest rates and even indicated in an interview with the BBC that the escalating crisis may warrant another emergency reduction this week after the UK economy contracted by the most since 1990 in the third quarter.

The deteriorating outlook of the global economy has also hurt the Euro in recent weeks as the single currency slips to a fresh two year low versus the Dollar as European stocks continue to slide and business confidence in Germany declines to the lowest level in five years.

The Ifo sentiment index showed that confidence slipped to the lowest since January 1991 as the escalating financial crisis dimmed the outlook for growth, while the report also reiterated that the German economy is struggling to recover from a second quarter contraction and that may force the ECB into action.

The Central Bank President Jean-Claude Trichet said yesterday that policy makers may consider cutting interest rates next week, less than a month after a coordinated 50 basis point reduction that has thus failed to bring stability back to the market.

In a speech in Madrid, Trichet said that he would “consider it possible that the Governing Council would decrease interest rates once again at its next meeting” but he declined to comment on the scale of the reduction.

Data Released 28th October

U.K 11:00 CBI Distributive Trades Survey

U.S 13:00 Case Shiller House Prices (August)

U.S 14:00 Consumer Confidence (October)

written by Adam Solomon

Another remarkable week in financial markets saw the Pound plunge almost 10% against the Dollar, while the UK currency also dropped to a fresh record low versus the Euro amid stories of suspended trading on stock, hedge funds in chaos and the prospects of another coordinated round of interest rate cuts.

The fear and panic gripping global markets shows few signs of abating as traders and investors are forced to liquidate positions in equities, commodities and high-yielding currencies amid mounting evidence that the global economy was heading for a prolonged recession.

As a result, traders look set to remain on high alert over the coming days as the momentous fall in stocks combined with the uncertain trading environment continued to favour ‘defensive’ currencies like the Japanese Yen, the U.S Dollar and the Swiss Franc.

The unquenchable rise in risk aversion continued to weigh heavily on Sterling sentiment as the Pound fell below $1.5300 at one point on Friday, to record the biggest weekly decline since ‘Black Wednesday’ in 1992, while the UK currency also slipped towards 1.2200 versus the Euro amid a barrage of weakening economic reports.

Official figures on Friday showed that UK gross domestic product dropped 0.5% from the second quarter, more than double initial forecasts, and indicated that the financial crisis has heavily affected industries from banking through to construction as the economy enters its first recession since 1991.

The report from the Official of National Statistics was the catalyst for a yet another decline in UK stocks as the FTSE 100 index lost a further 5% on the session, while the Pound suffered its sharpest intraday drop against the Dollar in at least 37-years as the report supported the Prime Minister’s damning assessment on the outlook for growth.

Gordon Brown’s £500 billion injection of emergency funding, combined with the Bank of England’s 50 basis point interest rate cut has thus far done little to bring a sense of stability and calm back to the market and there are real concerns that the biggest rate reduction since 2001 has come too late to prevent a recession.

The subsequent reaction to the report may indicate that the BoE will need to implement another rate cut in November as BNP Paribas predict a full percentage point reduction from the current 4.5% and the increased appetite for lower yielding assets may see the Pound come under renewed selling pressure in the near-term.

Bank of America Corp and JP Morgan Chase & Co have both forecast a 75 basis point cut on the November 6th announcement despite the BoE not cutting by more than half a point since the Central Bank started setting interest rates after Labour came to power in 1997.

The historic level of volatility sweeping through financial markets saw the Pound trade at $1.5269 on Friday, the lowest since August 2002, before bouncing back towards $1.5900 at the close, while the Pound also came back from a record low against the Euro after declining 2.5% in just a week.

The collapse in credit markets and the worst housing slump in a generation have buffeted the government’s efforts to restore confidence to the market and the figures on Friday only weigh in to the argument that the UK economy has already entered a recession , while growth is expected to contract for the next three quarters.

The decline in Sterling was reminiscent of the moves seen in September 1992 after the then Prime Minister John Major pulled the currency out of the Exchange Rate Mechanism but Friday’s drop was the largest since 1971, when former U.S President Richard Nixon ended the global fixed exchange rate regime set up at the Bretton Woods conference at the end of the Second World War.

The so-called safe haven currencies are likely to remain the most attractive commodity to investors over the coming week as the Yen also rose 15 % in value against the Sterling last week and the increased appetite for risk aversion may see the Pound slip inevitably towards the 1.40 levels versus the Dollar.

Although the Euro took advantage of broad Sterling weakness last week, the single currency continues to look vulnerable against a basket of currencies, registering the steepest weekly loss versus the Dollar since the Euro’s introduction in 1999.

Amid a packed week of Euro-zone data, the single currency could again struggle to stem the losses with the German Ifo sentiment index expected to show confidence slipped again, while the flash estimate of consumer prices may show that inflation is trending downwards, giving policy makers the scope to continue lowering interest rates.

The U.S currency gained the most in 16-years against six of the major currencies and rallied an incredible 6% versus the Euro to touch the highest level in two years at 1.2616 as the global economic slump helped demand for the Dollar as a relative safe haven from losses in emerging markets.

The unrelenting increase in appetite for Dollar denominated assets comes despite the plunge in the U.S stock market last week as the Standard & Poor’s Index dropped 6.8% on the week, while the Dow Jones Industrial Average also fell 5.4% amid suggestions that trading would be suspended amid historic levels of volatility.

Nevertheless, the dwindling sentiment surrounding stocks has failed to curtail the Dollar’s momentum and the U.S currency may again stand firm as the Federal Reserve convenes this Wednesday and the futures market has gone from pricing in a quarter percentage point cut to look for a 50 basis point reduction.

Data Released 27th October

GER 09:00 Ifo Index (October)

EU 09:00 M3 / 3 Month Moving Average (September)

U.S 15:00 New Homes (September)

written by Adam Solomon

The Pound declined for a second consecutive day against the Dollar, dropping to a low of $1.7137 in early trade with UK stocks plunging a further 7% as a rising element of risk aversion stalked the market and traders become sceptical that the unprecedented injection of liquidity would fail to restore confidence to the banking system.

Money market rates in London continued to slide for a second day after central banks provided a further $254 billion in emergency funding in a somewhat vain attempt to ease the turmoil surrounding credit markets, while UBS AG, the biggest loser of the financial crisis, received a $59 billion government bailout.

The London interbank rate or Libor rate, that banks charge each other for a three month loan in Dollars, declined for a fourth straight day, while the British Bankers' Association also reported that the overnight lending rate fell 20 basis points to the lowest level since November 2004.

The lack of confidence between banks is all too apparent despite signs that lending rates are generally coming down but the partial declines indicate that the $3 trillion earmarked by governments to tackle the collapse may not be enough to prevent a global recession as global stocks slid and investors returned to safe haven currencies like the Yen and the U.S Dollar.

The Australian and New Zealand Dollar again made substantial losses against the majors, while the South African Rand suffered the worst intraday slide since 1994 as the severe lack of confidence sweeping through financial markets encouraged traders to sell high yielding currencies in favour of low cost loans in Japan.

The Bank of England said yesterday that it will delay the disclosure of emergency borrowing and reduce the penalty charged on overnight loans to eliminate the negative interpretation of central bank assistance, while the ECB also said that will accept lower-rated securities as collateral and offer struggling institutions as many Euros as needed.

The Euro slumped for a second day against the Dollar and also came under renewed selling pressure versus the Pound after German stocks plunged on concerns that the mounting liquidity in bank bailouts across Europe and the U.S will fail to prevent a recession.

The German DAX index has dropped 10% in the past two days, erasing almost all of its 14% rally at the beginning of the week and the Euro is struggling to recover its losses amid speculation that the single currency is ‘overvalued’ at its current position.

The Dollar rallied against the majority of the major currencies yesterday as investors returned to the security of lower yielding assets and crude oil prices weakened below $70 a barrel for the first time August 2007.

The U.S currency gained a further 0.3% in value against the Euro and resumed its upside momentum versus the Pound amid concerns that the worsening credit crisis will weigh on fuel demand over the coming months.

In terms of economic data, the Dollar again shrugged off a barrage of weakening economic reports as the U.S downturn in growth deepened in October as the credit crisis intensified and industrial output fell 6% in the third quarter.

The Philly Fed index fell to an 18-year low this month and the most since 1991, while a separate report from the Labour Department showed consumer prices didn’t increase for two straight months the first time in two years.

Moderating inflationary pressures will give the Federal Reserve the scope to lower interest rates again this month after a cohesive move last week to cut borrowing costs by 50 basis points in an emergency meeting.

Data Released 17th October

EU 10:00 Foreign Trade Balance (August)

U.S 13:30 Housing Starts (September)

- Permits

U.S 14:55 Michigan Sentiment (October Prelim)

written by Adam Solomon

The UK stock market plunged almost 8% yesterday, declining for the first time in three days, amid concerns that the injection of up to $2 trillion in liquidity will not be enough to resurrect the world banking system and bolster economic growth.

The slump in global stocks led to an increased appetite for risk aversion as the higher yielding currencies came under renewed selling pressure with the Australian and New Zealand Dollar falling sharply, while the South African plunged to a new low against the Pound on concerns of a global recession.

The benchmark FTSE 100 index slipped 311.17 points on the session after rallying 12% over the previous two days after the UK government promised to inject £37 billion into struggling British banks and central banks worldwide announced bailouts with funding to unfreeze credit markets.

Nevertheless, the Pound relinquished much of the previous day’s gains against the Dollar, dropping to a low of $1.7294 by the close last night, while the UK currency also fell back towards 1.2800 versus the Euro as UK unemployment rose to the highest level in almost two years in September.

The fear and panic that has gripped financial markets over the past few weeks is still proving prevalent but the Pound was also hampered as claims for jobless claims benefits rose 31,800 to 939,000, the highest level since November 2006.

The prospect of a recession and the global financial crisis has prompted a spate of job cuts from financial institutions and construction companies but the result of the report was slightly better than initial forecasts as economists predicted an increase of 36,000.

Rising unemployment may curb the government’s efforts to revive confidence in the Labour party and the Prime Minister will want to build on the worldwide plaudits received for his handling of the credit crisis and attempts to restore confidence in the UK banking system.

The unemployment rate in the three months through August rose to 5.7%, the most since 2000, and that compares with 7.5% in the Euro-zone and 6.1% in the U.S as the number of people out of work rose 164,000 from the previous quarter, the largest increase since the end of the last recession in 1992.

In a statement to journalists in Brussels, Gordon Brown said that the government will do everything possible to help create jobs and halt the rising unemployment rate, which threatens to scupper a revival in Labour support in the build up to the next election.

UK economic growth stalled in the official figures for the second quarter, bringing to an end the longest stretch of uninterrupted expansion in a century and the International Monetary Fund anticipates that the UK economy will contract 0.1% in 2009 after forecasting growth of 1.6% just six months ago.

Elsewhere, the Pound also remained subdued after a separate report on the UK property market showed that house prices may fall another 15% by the end of next year as home values slide back towards the 2003 levels.

The slump in housing will leave 5 million properties with a lower value that the purchase price and reports yesterday indicate that we won’t see the bottom of the market until early 2010.

The Euro declined heavily against the Dollar yesterday and also registered initial losses against a basket of currencies as German stocks slumped for the first day in three on concerns that the unprecedented injection of liquidity will do little to prevent a global recession.

The higher yielding currencies came under massive selling pressure and the Canadian Dollar declined as oil prices slid back towards $75 a barrel for the first time in more than year as commodities follow equity markets this month and the global credit crisis deepens.

The Dollar made robust gains against the majority of the major currencies yesterday as traders sought the security of ‘safe haven’ currencies and the Dow Jones plunged as U.S retail sales slumped to the lowest level in at least 16-years.

Purchases fell 1.2% in September, even before this month’s market collapse, signalling that the U.S economy is teetering on the brink of recession as sales declined for three straight months, the first time that has happened since comparable records began in 1992.

Data Released 16th October

U.S 13:30 Consumer Price Index (September)

- Ex Food & Energy

U.S 13:30 Initial Jobless Claims (w/e 10th October)

U.S 13:30 Real Earnings (September)

U.S 14:00 TICs Capital Inflows (August)

U.S 14:15 Industrial Production (September)

U.S 14:15 Capacity Utilisation (September)

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

U.S 18:00 NAHB Housing Market Index (October)

written by Adam Solomon

The U.S Dollar plunged for a second day yesterday as the return to risk appetite drained demand for ‘safe haven’ assets and the Pound recorded its biggest two day gain against the greenback in more than three years as UK stocks advanced before falling back into negative territory by the close of trading last night.

The UK currency rallied to a high of 1.7628 in New York, before dropping back towards 1.7400 at the close, while the Pound also rose above 1.2800 versus the Euro after the FTSE 100 Index increased a further 3% in early trade after the government injected £37 billion to rescue the UK banking system from possible collapse.

The short-term revival in Sterling sentiment also saw the Pound pair gains against a basket of currencies as ten-year gilts declined for a sixth straight day following reports that UK inflation accelerated to the fastest pace since at least 11-years in September.

The annual pace of inflation rose 5.2% from this stage in 2007, the most since records began in 1997, squeezing consumers disposable income and their ability to cope with higher living costs following a record surge in food and energy prices this year, while the financial market turmoil curbed lending.

Oil prices have fallen 45% since the July high of $147 a barrel as the prospect of a global recession weighs on global demand for fuel and BoE policy maker Andrew Sentence said on Monday that the recent drop in prices will begin to feed through to the broader economy.

Consumer prices have now exceeded the government’s 2.0% target for the past 12 months and the Bank of England elected to cut the benchmark interest rate last week by half a percentage point in an emergency meeting but the crisis of confidence in the banking system and lower commodity prices have raised the risk that inflation will undershoot target over the coming months.

The record increase in consumer prices will do little to affect the prospect of a further reduction in borrowing costs and the Pound was subsequently unchanged in the aftermath of the report, while stocks recovered for a second day in a row before falling on concerns about liquidity.

The Pound also shrugged off separate reports yesterday, which showed that UK home sales fell in September to the lowest level in at least 30-years as the ongoing financial crisis prompted price drops across the nation, according to a report from the Royal Institution of Chartered Surveyors.

The global credit crisis has drained confidence among consumers and investors alike and pushed mortgage lending to the lowest level since records began in 1999 but the unprecedented injection of liquidity into the banking system may mean that lenders can finally lower mortgage rates and revive the UK property market.

The Euro rose 0.6% in value against the Dollar yesterday but the single currency continued to struggle against the Pound amid speculation that the European Union’s €1.1 trillion rescue package, designed to revive the region’s bank system, has come too late to keep the Euro’s biggest drop on record from getting worse.

In the past two days the EU have agreed to guarantee bank loans and take stakes in struggling lenders in an attempt to prevent the Euro-zone economy from slowing but senior currency strategists at Morgan Stanley predict that the Euro will decline to $1.2500 against the Dollar next year from $1.60 just three months ago.

The single currency appears increasingly overbought and over overvalued and as recently as April this year, economists predicted that the Euro would overtake the Dollar as the world’s reserve currency but the outlook is beginning to dim at the European economy slows more than the U.S.

Nevertheless, the Euro has made recent gains against the Dollar and that trend continued yesterday despite reports in Germany that investor confidence in the region dropped for the first time in three months in October, to a near record low, as the global credit crisis threatened to push Europe into a recession.

Data Released 15th October

U.K 00:01 RICS House Price Survey (September)

U.K 09:30 Average Earnings (3 Months to August)

U.K 09:30 Claimant Count Unemployment (September)

U.K 11:00 CBI Manufacturing Survey – Orders (October)

EU 10:00 Harmonised Index of Consumer Prices (September Final)

U.S 13:30 Empire State Index (October)

U.S 13:30 Producer Price Index (September)

- Ex Food & Energy

U.S 13:30 Retail Sales (September)

U.S 15:00 Business Inventories (August)

U.S 19:00 Fed Beige Book

written by Adam Solomon

The Pound rallied by the most in over a month against the Dollar yesterday, while the UK currency also made gains versus a basket of currencies, including the Euro, following reports that the UK government intervened with a £37 billion rescue package to save the Royal Bank of Scotland, HBOS Plc and Lloyds TSB Group.

The second largest UK bank before shares ousted its chief executive and conceded control to the government in exchange for a £20 billion lifeline, while HBOS Plc and Lloyds TSB Group will also receive an amount in the region of £17 billion in order to avert a banking collapse.

The intervention to save Royal Bank of Scotland Plc represents the biggest bank in Europe to be nationalised and will receive more from the government than any UK bank, taking almost all of the money that the Prime Minister Gordon Brown initially earmarked as the minimum required to shore up the industry’s capital.

The unprecedented injection of funds is intended to prevent a financial meltdown and the Pound bounced back after three consecutive days of losses against the Dollar as RBS Plc and HBOS Plc will cede majority control over to the government, giving Gordon Brown seats on their boards, while halting dividends and stopping cash bonuses to their directors.

The Bank of England and the UK Treasury are beginning to set an example globally to other central banks in developing a concise and vigorous plan to fix the problems in the banking system and finally bring a level of confidence back to the market.

The unprecedented action has been viewed very positively in the aftermath of the announcement and the Pound subsequently strengthened 2.4% against the Dollar to close above $1.7400 last night to record the biggest single day gain since September 12th.

Other financial institutions are also expected to seek emergency funding but Barclays Plc declared that it will try to raise more than £6.5 billion by selling shares to private investors without asking for help from the government, while the funding will also allow banks to boost their so-called ‘tier one capital’ ratio to more than 9%.

The UK stock market rebounded from the worst weekly decline since 1987, rising 8.3% on the session, as shares in HSBC Holdings Plc and Standard Chartered Plc climbed as all but six stocks rallied following the government intervention to rescue some of the UK’s largest banks.

UK government bonds fell after the announcement as the declines sent the yield on the 10-year note 20 basis points higher to 4.66% and investors increased bets that the Bank of England will lower interest rates to revive lending as the pace of inflation decelerates.

The annual pace of inflation will probably slow below the Central Bank’s 2.0% target over the coming months and that sentiment was reflected in a statement from policy maker Andrew Sentence yesterday as he said that inflation “could quite conceivably undershoot the 2.0% target for a while”.

Consumer prices have accelerated to 4.7% in August and may rise above 5.0% in the short-term before receding back towards target in the first quarter of 2009, while separate reports yesterday showed that UK producer prices dropped for a second consecutive month in September.

Prices charged by factories slumped 0.3% from a month earlier, when the decline was revised lower to 0.7% to represent the largest drop since records began in 1986 and correlate with the overwhelming drop in commodity prices over the same period.

It will take some time for the drop in crude oil prices to feed through to the broader economy and the a report from the Office of National Statistics this morning will probably confirm that consumer price inflation increased 0.4% on the month in September to rise to 5.0% from this stage in 2007.

The Euro suffered a sharp intraday decline against the Pound yesterday, closing above 1.2700 last night but the single currency rallied by the most in three weeks against the Dollar after European leaders agreed to guarantee bank borrowing and prevent failures that would further exacerbate the volatility sweeping through global money markets.

The widespread decline in the U.S Dollar also extended to the high yielding currencies after the Australian and New Zealand Dollar also bounced back by the close last night as the Federal Reserve and three other central banks announced unlimited dollar auctions that reduced demand for the U.S currency for funding between financial institutions.

These measures have improved investor’s appetite for riskier assets as some level of confidence returned to the market, which is reflected in the Yens performance against the majors yesterday, and the Euro rallied 1.4% against the Dollar to a high of $1.3595 on the session.

European policy makers met in Paris over the weekend and pledged to guarantee, until the end of 2009, bank debt issues with maturities up to five years as France, Germany, Spain and Austria commit €1.1 trillion to guarantee bank loans and bailout lenders.

In addition, the Australian Dollar also bounced 8.4% higher yesterday after the G-7 finance ministers promised to take “all necessary steps” to repair the damage to global credit markets and it will be interesting to gauge the performance of the U.S stock market today following the Columbus day holiday.

Data Released 14th October

U.K 00:01 BRC Retail Sales (September)

U.K 09:30 Consumer Price Index (September)

- Retail Price Index

U.K 09:30 DCLG House Prices (August)

GER 10:00 ZEW Index (October)

EU 10:00 Industrial Production (August)

written by Adam Solomon

Following on from last week, the exceptionally turbulent market conditions continued on Friday as global stock markets plunged and the Pound dropped to the lowest level against the Dollar in almost five years despite the announcement of UK rescue package and a coordinated round of interest rate cuts from six leading central banks.

The unprecedented and cohesive move to lower rates by 50 basis points on Wednesday did little to bring some sense of stability back into financial markets and with equities continuing to decline and credit markets remaining all but frozen, traders were banking on the weekend’s G7 meeting for some relief amid hopes that members will guarantee all interbank lending.

The distinct lack of confidence surrounding financial markets means that risk aversion will remain the focal point this week as the Yen looks poised to remain the currency of choice as investors look to take advantage of its perceived ‘safe haven’ status, while the Dollar is also benefiting as banks and companies scramble for U.S funding.

As a result, the Pound and the Euro will remain subdued in the short-term, with the UK currency particularly vulnerable amid speculation of a further Bank of England rate reduction over the coming months and unless market conditions begin to stabilise, the other high yielding currencies, including the Australian and New Zealand Dollar, are likely to decline further.

In addition, the Pound fell under $1.7000 versus the Dollar on Friday on concerns that the dispute between the UK and Iceland over the collapse of Icelandic banking system will escalate after the Prime Minister Gordon Brown said that the UK may freeze the assets of Icelandic companies as the two countries argue over a compensation package for overseas savers.

The UK exposure in Iceland has weighed heavily on sentiment as the Pound declined to a low of $1.6922 against the Dollar on Friday, while the UK currency also fell below 1.2500 versus the Euro before bouncing back towards 1.2700 by the close of trading.

Gordon Brown claims that Iceland is failing to honour its guarantee to cover overseas savers, leaving the UK government to supplement the loss and Iceland’s Prime Minister Geir Haarde said that the UK is to blame for triggering the crisis when it used anti-terrorism legislation to seize the assets of Icelandic banks.

The global financial meltdown also saw the Pound record the largest weekly decline in a decade against the Yen as the collapse in worldwide stock markets wiped more than $8 trillion off the value of global stocks this month and encouraged investors to reduce holdings in higher yielding assets funded in Japan.

The Group of Seven finance ministers, who acted in unison to lower interest rates last week, met in Washington over the weekend and vowed to prevent a global banking collapse without being specific in unveiling new initiatives to tackle the crisis and prevent a global recession.

The G-7 pledged to “take all necessary step to unfreeze credit markets” without detailing exactly how it would be accomplished and signalled that central banks would intervene to avoid a repeat of the collapse of Lehman Brothers Plc, which was the catalyst for a collapse in stocks as fear and panic gripped the market.

The downfall of the fourth largest U.S investment bank encouraged banks to stop lending to each other out of concern that they may not get their funds back but the G-7’s willingness to intervene may provide some relief for struggling financial institutions and it will be interesting to gauge the market’s reaction after the Columbus day holiday.

Data Released 13th October

U.K 09:30 Producer Price Index
- Output

U.S Columbus Day Holiday

written by Adam Solomon

The Pound revered earlier gains against both the Euro and the Dollar yesterday as the UK currency actually fell under $1.7100 versus its U.S counterpart last night, dropping to the lowest level since December 28th 2005, amid speculation that the Bank of England will cut interest rates from the current 4.5% following a 50 basis point reduction this week.

UK government bonds slumped as Central Banks around the world stepped up efforts to avert a global financial meltdown and the minor increase in risk appetite dampened demand for the most ‘secure’ assets, while the decline pushed the yield on the two-year gilt up from the lowest level since July 2003.

The Chancellor of the Exchequer Alistair Darling pumped £50 billion into the banking system yesterday and the UK government may own as much as 30% of four of the country’s biggest banks as part of an unprecedented rescue package, which may see bonds rally as the risk of a recession prompts the BoE to lower the benchmark lending rate to 3.0% by the middle of next year.

The Bank’s monetary policy committee was due to convene yesterday lunchtime for the latest rate announcement but the cohesive action on Wednesday has curtailed the Pound’s momentum against the Euro as the UK currency traded under 1.2600 by the close of trading last night.

As an element of risk appetite returned to the market, the Pound also registered sharp intraday losses against the Australian and New Zealand Dollar, while bonds declined even as reports from HSBC Plc showed that UK house prices dropped for an eighth straight month in September.

The International Monetary Fund has already forecasted that the UK economy will contract in 2009 after forecasting growth of 1.6% six months ago after the decline in the property market shows few signs of abating, while manufacturing and service sector growth slides into contraction.

From a technical perspective, the Pound looks poised for a further downside move against the Dollar with technical support at $1.7000 in the near-term and the probability of a move towards $1.62 by the end of the year looks increasingly likely as the sentiment surrounding the outlook for the UK economy dwindles.

Former Bank of England policy maker Christopher Allsopp, who voted in favour of the Bank’s last emergency decision seven years ago, believes that the MPC will have to lower rates again over the coming months amid suggestions that injection of liquidity will fail in bringing long-term stability to financial markets.

The Dollar bounced back against the Euro for the first time in three days yesterday after a plunge in the U.S stock market increased demand for Dollar denominated assets as a relative safe haven from financial market turmoil.

The Dow Jones Industrial Average fell below 9,000 for the first time since 2003, discouraging investors from buying higher-yielding assets funded by lower cost loans in Japan and the Group of Seven nations will start a two day meeting in Washington today to discuss the financial crisis, which has already led to a government bailout in most of the member nations.
Data Released 10th October

U.S 13:30 Export Prices (September)

- Import Prices
U.S 13:30 International Trade Balance (August)

U.S 19:00 Federal Budget (September)

written by Adam Solomon

The Bank of England, the European Central Bank and the Federal Reserve, along with four other central banks, elected to lower interest rates in an unprecedented coordinated effort designed to ease the turmoil that has engulfed financial markets and brought about the worst crisis since the Great Depression.

The emergency announcement saw policy makers slash the benchmark lending rate by half a percentage point and yesterday’s momentous decision follows a near global meltdown that sent stocks tumbling worldwide as the Dow Jones industrial average heads for the biggest annual decline since 1937.

The Bank of England’s monetary policy committee elected to cut rates to 4.50% in a vain attempt to unlock credit markets, while the Federal Reserve also reduced its benchmark lending rate to 1.5% and the ECB cut its main rate to 3.75%.

In the minutes that followed the announcement the Pound remained largely unchanged at $1.7536 against the Dollar but by the close of trading last night the UK currency had slipped to a low of $1.7259, while also registering sharp losses versus the majority of the 16 most actively traded currencies.

The heightened appetite for risk aversion has prompted investors to sell high-yielding currencies in favour of lower cost loans from Japan and that sentiment has been perfectly illustrated in the overwhelming decline in value of the Australian and New Zealand Dollar.

In the minutes that followed the announcement, stocks rallied before a sharp move lower as speculation mounts that the emergency reduction in borrowing costs will do little to bring stability back to financial markets, while some analysts argue that central banks should have lowered rates by more than 50 basis points.

UK stocks slumped 5.2% on the session to overshadow the Bank of England’s historic move to lower interest rates outside of the scheduled announcement as HSBC Holdings Plc, RBS Plc and the largest UK banks face the most debt coming due in at least 10-years following the seizure of global credit markets.

Borrowing costs have subsequently increased to the highest level on record and the six biggest UK banks have a combined £54 billion of debt to refinance in April of next year, which represents three times the amount from this stage in 2007.

Economists at Goldman Sachs Group Inc and Morgan Stanley are already betting on the potential for another half a point cut by the Federal Reserve at the end of October as the Treasury Secretary, Henry Paulson, concedes that the intensification of the financial crisis has accelerated the downside risks to economic growth.

The joint statement indicates that policy makers will need to continue lowering interest rates over the coming months and the International Monetary Fund said yesterday that the world economy is heading for a recession in 2009 and estimates that the losses from the credit crisis will hit $1.4 trillion.

The U.S government has already announced a $700 billion rescue package to buy troubled assets from banks in an effort to provide some sense of renewed confidence into the market and yesterday the UK Chancellor of the Exchequer, Alistair Darling, announced an unprecedented step to inject £50 billion into the UK banking system.

The UK government may have to increase borrowing by £50 billion to fund the rescue plan, which will limit the amount spent on tax reductions and extra spending to boost the economy as it slips perilously towards a recession.

The UK treasury plan to sell £25 billion of bonds to buy troubled shares in Royal Bank of Scotland Group Plc, Barclays Plc and at least four other banks by March 31st under an emergency measure announced yesterday with another £25 billion available to banks that require further capital.

The auctions will add to a £633 billion national debt that has soared in recent times after the Prime Minister Gordon Brown borrowed heavily to pay for investment in schools and hospitals during his tenure as the UK finance minister.

The nationalisation of Bradford & Bingley Plc coincided with the European government bailout of Fortis Bank, Dexia SA and Hypo Real Estate Holding AG and reports yesterday also claimed that the ECB will spend as much as €50 billion to buy troubled banking assets.

The Fed’s Open Market Committee, which voted unanimously to cut interest rates yesterday, said in its accompanying statement that recent economic data suggests that the pace of activity has slowed markedly in recent months, while the volatility surrounding financial markets is likely to restrain business and consumer spending.

The collapse of the fourth largest U.S investment bank, Lehman Brothers Holdings Inc, was the catalyst for the recent market turmoil and the decision to let the bank fail has had enormous consequences that have reverberated through financial markets, finally culminating in a cohesive effort to lower interest rates yesterday.

On the day that Lehman Brothers Plc filed for bankruptcy, the European Central Bank President, Jean-Claude Trichet, finally acknowledged that the Central Bank may be ready to cut rates and governing council member Ewald Nowotny said in an interview that today’s rate reduction should not be interpreted as the first in a possible series of cuts.

Nevertheless, the ECB chairman, Trichet, released a statement yesterday afternoon that refused to rule out any further interest rate cuts over and insisted that the Central Bank will start lending banks unlimited funds in its weekly auctions at the new benchmark lending rate of 3.75% in an effort to solve the credit crisis.

In terms of economic data, the Euro stood firm against the Dollar and made widespread gains across the board, closing well under 1.2700 versus the Pound after opening above 1.2900 earlier in the session, despite reports that the European economy contracted in the second quarter, led by a drop in corporate investment and consumer spending.

Euro-zone gross domestic product fell 0.2% from the previous quarter as the outlook for the economy continues to deteriorate with manufacturing output and service sector growth slumping to the lowest level in seven years.

The Euro also gained in support after German industrial production rose by the most in 15-years in August led by a surprise increase in demand for construction as output gained 3.4% from July, rising for the first time in nine months.

Data Released 9th October

U.K 09:30 Trade Balance (August)

- Non EU

EU 09:00 ECB Monthly Bulletin

U.K 12:00 BoE Rate Announcement (Cancelled)

U.S 13:30 Initial Jobless Claims (w/e 3rd October)

U.S 15:00 Wholesale Inventories (August)

written by Adam Solomon

The Pound declined against both the Euro and the Dollar yesterday and the UK currency also relinquished some of the previous day’s gains versus a basket of currencies following reports that UK industrial production contracted for a sixth straight month in August.

According to a report from the Office of National Statistics, UK manufacturing output slumped 0.4% from July, fuelling further speculation that the credit crisis has plunged the economy into a recession as factory production hit the worst streak in almost 30-years.

The last time that manufacturing fell for at least six consecutive months was in 1980 and the British Chamber of Commerce recommended yesterday that the Bank of England should cut interest rates by 50 basis points after its quarterly survey of business confidence suggested that weakness in production threatens to exacerbate the economic downturn.

UK manufacturing accounts for 14% of the economy, compared with roughly 75% for service industries, and the report yesterday showed that output has contracted 1.9% from this stage in 2007 to record the biggest monthly drop since 2003.

A number of economists have speculated on the outcome of the BoE interest rate announcement on Thursday and an economist at BNP Paribas SA, Alan Clarke, said yesterday that the weakness in the BCC survey warrants a 50 basis point reduction this week.

In the aftermath of the report, the Pound dropped to a fresh two and a half year low versus the Dollar, while the UK currency also snapped a three-day winning streak against the Euro as separate reports indicated that UK car sales fell 21% in September after slower growth curbed demand for British exports.

Policy makers may need to take a more aggressive step than the market is currently expecting amid the significant downturn in UK economic data and potentially recessionary conditions, while the Pound may continue to decline in the build up to the announcement as the market slowly factors in a 50 basis point reduction.

However, the Bank’s monetary policy committee may elect to slash rates by just a quarter of a percentage point and the Pound may actually find some support if policy makers refrain from making a greater reduction.

The UK government may invest at least £45 billion into banks including Royal Bank of Scotland Group Plc and Barclays Plc in an attempt to bolster capital that has been depleted by mortgage related losses and the imminent rescue package would be the biggest step yet to stem the turmoil that has engulfed financial markets.

Lenders, including RBS Plc, may be well placed for an immediate cash injection and additional guarantees on customer deposits should credit markets deteriorate further but some investors are sceptical whether the plan will solve the problem with liquidity.

The legislation is aimed at preventing another run on a UK bank after share prices in RBS Plc, the third largest British bank by market value, plunged to the lowest level in at least 15-years amid speculation that the bank would need emergency funding from the government.

Nevertheless, the Pound has continued to make unprecedented gains against the Australian and New Zealand Dollar as investors shy away from higher yielding assets in favour of low cost loans from Japan and that is a trend that may continue in the short-term as trader appetite for risk aversion increases.

Data Released 8th October

U.K 00:01 NIESR GDP Estimate (3 Mths to Sept)

EU 10:00 Gross Domestic Product (Q2 Final)

GER 11:00 Industrial Production (August)

U.S 15:00 Pending Home Sales (August)

written by Adam Solomon

The intraday volatility sweeping through financial markets saw the Pound register sharp losses against the Dollar yesterday as the UK currency also fell to the lowest level in five years versus the Yen as the credit crisis deepened in Europe and investors sought the security of lower yielding assets in Japan.

As a result, the Australian and New Zealand Dollar also came under renewed selling pressure against the Pound despite speculation that the Bank of England will cut interest rates this week in a vain attempt to bolster the UK economy that may already be in the midst of a recession.

The U.S government intervention on Friday has done little to bring stability back to financial markets as global stocks plunged yesterday and that prompted the UK Chancellor of the Exchequer Alistair Darling to pledge new legislation to preserve confidence in the UK banking system as lawmakers and former policy makers called for him to provide cash for equity markets.

UK stocks plummeted as the FTSE 00 Index dropped by the most since October 20th 1987, led by banks, amid concerns that the credit crisis is worsening and the value of the UK’s top 100 companies has now fallen 29% this year as the cost of borrowing money skyrocketed and consumer demand weakened.

The finance minister will announce new banking rules through Parliament today, seeking emergency powers to manage failing institutions and speaking to the House of Commons yesterday, Darling declined to rule out any options, saying “these are exceptional times” and “we must move far more quickly”.

The former Bank of England Deputy Governor Howard Davies also said yesterday that the Treasury should provide direct support for banks by purchasing equity stakes and extending a guarantee on deposits from the current £50,000 limit.

The Prime Minister Gordon Brown is under pressure to take further action after Ireland, Germany and Greece backed unlimited deposits in their banks, which threatens to drain the cash from savings accounts in the UK as consumers seek greater guarantees in Europe.

The UK government took the necessary steps to nationalise Northern Rock Plc in February and recently seized the loan book of Britain’s biggest buy-to-let mortgage provider, Bradford & Bingley Plc, as a signal to the market that the government will stand behind UK financial institutions in times of turmoil.

Darling also said yesterday that Northern Rock Plc has paid back half of the money it had to borrow from taxpayers ahead of schedule and the tone of the Chancellor’s statement indicates that the government may be pressurising the Bank of England into action this Thursday after Darling pledged “to do whatever it takes” to help its banks.

The speculation surrounding the probability of a greater 50 basis point cut has sent the Pound tumbling against the Dollar and the market may slump to $1.71 over the coming weeks but the UK currency again took advantage of broad Euro weakness to rise to the highest level in seven months amid concerns that the financial crisis is deepening in Europe.

In terms of economic data, the Pound may come under further pressure this morning as UK industrial production probably slumped 2% in August, while consumer confidence is expected to fall further in September after remaining unchanged at a four-year low in August.

BNP Paribas SA agreed to take control of Fortis bank for €14.5 billion, while the German government, together with banks and insurers agreed on a €50 billion rescue plan for Hypo Real Estate Holding AG but shares in the commercial provider plunged yesterday amid suggestions that the bailout will fail.

The Euro suffered its biggest one-day drop against the Yen on record, while the single currency also extended its decline against both the Pound and the Dollar as the escalating financial crisis prompted European governments to pledge action, while avoiding any announcement of a plan comparable to the $700 billion U.S bailout.

The correlation between falling oil prices and a strengthening U.S Dollar has become all too apparent in recent months and as the price of crude oil slipped to an eight month low under $90 a barrel yesterdat, the Dollar subsequently rallied against a basket of currencies.
Data Released 7th October

U.K 09:30 Industrial Production (August)

- Manufacturing Production

GER 11:00 Industrial Orders (August)

U.S 19:00 FOMC Meeting Minutes (16th September Meeting)

U.S 20:00 Consumer Credit (August)

written by Adam Solomon

Following on from last week, the Pound declined by the most in a week against the Dollar since the end of the last recession in 1992 amid reports that UK service sector growth contracted by the most in at least 12-years, increasing speculation that the economy may already be in a recession and the Bank of England will cut interest rates this week.

The UK currency lost a further 3.9% in value against the Japanese Yen as investors sought the security of lower yielding assets after the U.S government stalled on a rescue plan to pump up to $700 billion into financial markets in an attempt to restore some level of confidence.

In addition, UK manufacturing output also fell at the fastest pace in 16-years, while a separate report from the Nationwide Building Society showed that UK home values plummeted as banks scaled back lending following the government’s seizure of Bradford & Bingley Plc.

The shortage of credit has led to the nationalisation of Britain’s biggest buy-to-let mortgage lender and reports last week suggested that Santander SA are prepared to rescue the ailing bank, while Lloyds-TSB appear poised to step in and save HBOS Plc as the share price in the UK’s biggest mortgage provider plummeted as the financial crisis deepened.

The Bank of England’s monetary policy committee have thus far refrained from cutting interest rates since April as consumer price inflation hit the highest level in a decade but the lack of policy response has left the Pound in a vulnerable position.

The rising threat of a recession and the overwhelming drop in commodity prices may encourage policy makers to step in and reduce borrowing costs by a quarter of a percentage point this Thursday but the UK currency may continue the downside momentum against the majors in the build up to the announcement amid speculation of a greater reduction.

Citigroup Inc, BNP Paribas SA, and JP Morgan Chase & Co have all changed their forecasts to predict a 50 basis point reduction from the current 5.0% and that would represent the biggest single cut in rates since November 2001 and the aftermath of the September 11th terrorist attacks.

However, a number of other economists, including Deutsche Bank AG and UBS AG, are sticking with the assumption that policy makers will resist a greater reduction and will cut rates by just 25 basis points this month with the possibility of a back-to-back cut in November.

It is perhaps worth acknowledging that the Bank’s monetary policy committee voted 8-1 in favour of keeping interest rates unchanged at 5.0% in September with David Blanchflower the sole voice for a 50 basis point cut and it is inevitable that the staunch dove will again back a greater reduction in October.

The recent events in financial markets has seen the BoE provide a wider range of collateral in its three month money auctions to assist banks and the three month interbank lending rate has surged to 6.31% on October 1st, the highest level in 2008.

That decision prompted the governor of the Central Bank, Mervyn King, to release a statement last week saying that “in these extraordinary market conditions, the BoE will take all actions necessary to ensure that the banking system has access to sufficient liquidity.”

The Pound fell a further 0.4% on Friday to a low of $1.7565 versus the Dollar before consolidating at the close and the UK currency has now fallen 12% in value versus its U.S counterpart since the start of July while the technical outlook suggests that Sterling will weaken to $1.70 in 2009 and $1.60 later next year.

Nevertheless, the Pound rallied strongly against the Euro last week, breaking above the technical resistance at 1.2760 on Friday to close near the highest level in six months as the U.S led financial crisis spreads to Europe with Fortis Bank and Hypo Real Estate Holding AG requiring a government bailout.

In addition, the Euro came under additional selling pressure against Dollar, slumping to the lowest level in over a year after the ECB President, Jean-Claude Trichet, indicated that policy makers seriously considered cutting interest rates last week before electing to keep rates unchanged.

The Central Bank’s governing council members have maintained a staunchly hawkish stance on policy in recent months but the tone and language used in Trichet’s accompanying statement indicated that policy makers are ready to acknowledge that economic growth in the region is “weakening”.

The downside risks to growth are increasing while inflationary pressures are moderating and that has prompted speculation that the ECB will cut rates by the end of the year with investors betting on the probability of the first reduction in Trichet’s tenure as President next month.

Euro buyers are well positioned to take advantage of the current price or at the very least work a stop order in the market to protect against an adverse move amid speculation of a greater UK interest rate reduction on Thursday.

The worsening financial climate continued to help Dollar sentiment last week as the U.S currency posted its biggest weekly advance on record against the Euro, while the greenback also made robust gains against a basket of currencies amid a surge in demand for Dollar funding.

The Dollar also advanced against the Pound after the House of Representatives rejected the government’s unprecedented rescue package earlier in the week, while the U.S currency also made gains amid suggestions that the bailout won’t be sufficient in bringing long-term stability to the market.

The unpopular bill has been scrutinised as ‘Main street bailing out Wall street’ and the members of the lower house, who are up for re-election next year, initially voted against the injection of up to $700 billion in tax payers money, which would authorise the government to buy troubled assets from financial institutions struggling from a record number of home foreclosures.

Nevertheless, Congress finally passed the rescue plan on Friday evening as President George W. Bush signed a $700 billion bailout designed to unlock credit markets and restore some sense of confidence to the U.S banking system.

The bipartisan legislation was revised and deliberated over to contains $149 billion in tax breaks and affirms regulators’ ability to suspend asset-valuing rules that companies blame for fuelling the credit crisis in the first place.

The House of Representatives approved the measure 263-171 four days after rejecting an earlier plan and the bill’s defeat earlier in the week sparked a record fall in global stock markets, prompting lawmakers to switch their vote to approve the biggest government intervention since Franklin Roosevelt’s New Deal in the 1930s.

In terms of economic data, the Dollar stood firm as U.S non-farm payrolls contracted by 159,000 in September, following a revised decline of 73,000 in August, to represent the biggest loss in jobs since 2003 while the unemployment rate remained unchanged at 6.1%.

Data Released 6th October

No Data of Significance

written by Adam Solomon

The Pound continued to decline against the Dollar yesterday, falling to the lowest level in three weeks after a report from the Nationwide Building Society showed that UK house prices dropped in September by the most since records began in 1991, providing the Bank of England with yet more reason to cut interest rates as the economy drifts towards a recession.

The average cost of a home plummeted 12.4% from this stage in 2007 as UK banks and lenders scale back lending to companies and households amid fears that the escalating credit crunch has the potential to provoke a financial meltdown.

The overwhelming slump in the UK property market combined with tightening credit conditions could be the catalyst for an October rate reduction next week and the Pound is declining as global credit market turmoil saps confidence while inflationary pressures moderate in conjunction with falling commodity prices.

The Pound fell to a low of $1.7552, the weakest level since September 12th as the worst banking crisis since the Great Depression forced the sale of HBOS Plc, the U.K’s largest biggest mortgage lender, while the government was forced to seize control of Bradford & Bingley Plc and encouraged the Bank of England to provide emergency funding to money markets.

UK banks reduced the availability of credit in the third quarter by more than they had initially anticipated and the Bank of England predicts that it will become even harder to obtain credit over the coming months as both supply and demand for loans drops.

It appears increasingly likely that the Bank’s monetary policy committee lower the benchmark lending rate next week to 4.75% from 5.0% but some economists argue that a rate reduction could be positive for Sterling in the medium-term in the same way that an aggressive easing in U.S rates has been positive for the Dollar.

The Euro slumped to a 13-month low against the Dollar yesterday while the single currency also re-visited the top end of the long established trading range versus the Pound after the ECB kept interest rates on hold but the Chairman Trichet indicated that policy makers thought long and hard about a reduction.

The European Central Bank have maintained a staunchly hawkish stance on monetary policy but the tone and language used in the accompanying statement showed that policy makers are beginning to relent and acknowledge that economic growth in the region is “weakening”.

The downside risks to the economy are worsening while moderating inflationary pressures has prompted speculation that the Central Bank will cut rates by the end of the year and the ECB President Jean-Claude Trichet said yesterday that policy makers discussed a rate cut in October after the financial market turmoil spreads to Europe.

The Belgium bank Fortis was subject to a government rescue earlier this week and a number of other European financial institutions could be subject to a bailout in the coming weeks amid the unprecedented level of financial market volatility.

In addition, the Euro came under additional selling pressure after Trichet also said that the “upside risks to price stability have diminished somewhat” and it seems that the governing council members accept that inflationary will continue to moderate over the coming months, giving them the scope to lower rates in November.

Euro buyers would be well positioned to take advantage of the current rate as the market closes above 1.2700 versus the Pound but the UK currency may struggle to break above 1.2800 amid suggestions of a UK interest rate cut next week.

Elsewhere, the Euro also lost value amid speculation that the €35 billion bailout of the German commercial lender, Hypo Real Estate Holding AG, may collapse should banks fail to reach an agreement on their participation in the guarantees by Friday 3rd October.

The Dollar continued its dramatic upside momentum against the majors yesterday despite news that the U.S Senate passed the $700 billion financial market rescue plan that has been tweaked and loaded with incentives for the House of Representatives to finally approve following its rejection of an earlier version.

The legislation was approved late on Wednesday by the Senators of the upper house, who are NOT up for re-election next year, as the bill was passed by a 74-25 majority, authorising the government to buy ‘troubled’ assets from financial institutions in what would be the biggest intervention since the 1930s.

The Dollar has strengthened significantly against the Euro after the Senate approval revives expectations that the U.S will act faster than Europe to address the seizure in global money markets but Dollar sentiment may be severely tested if U.S lawmakers finally agree on the unprecedented bailout.

Data Released 3rd October

U.K 09:30 CIPS Services PMI (September)

EU 09:00 Services PMI (September)
EU 10:00 Retail Sales (August)

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

- Unemployment / Average Earnings

U.S 15:00 ISM Non-Manufacturing (September)

- Business Activity

written by Adam Solomon

The Pound declined against the Dollar for a third straight day on Wednesday while the UK currency also relinquished much of the previous day’s gains versus the Euro as the tentative price action surrounding financial markets continues in anticipation of the revised U.S rescue plan.

The Bush administration along with the majority of Congressional leaders acknowledge that the proposal to pump up to $700 billion into global money markets is absolutely necessary to avoid an economic meltdown but the terms of the bailout has proved hugely unpopular with voters who resent the idea of ‘main street’ bailing out Wall street.

The House of Representatives have already rejected the initial plan amid public uproar over the move and it is perhaps significant that the upper house of the Senate, along with the majority of Republicans and Democrats, are adamant that the plan must be passed but the lower house have been reluctant to sign off on an unpopular bill that could jeopardise their seats.

Both presidential candidates Barack Obama and John McCain have given their full backing to the initiative and the majority of the members probably accept that it is absolutely necessary with the revised plan raising protection on savings from $100,000 to $250,000 while substantial tax cuts for small businesses and middle classes should be enough to sway sceptical Congressmen.

Nevertheless, the delay in the bailout has created a severe element of risk aversion in financial markets and the Dollar has subsequently made robust gains against a basket of currencies but the Pound came under additional selling pressure yesterday after reports in the UK showed that manufacturing contracted in September.

A government report showed that output slumped at the fastest pace in 16-years as the credit crisis crippled lending while a separate gauge of the report indicated that growth in UK service industries also stalled in the three months through July and for the first time in six years after the economy failed to grow in the second quarter.

The negative tone of the report provides yet further evidence that the UK economy may have already entered a recession and that has sparked speculation that the Bank of England will lower interest rates from the current 5.0% before the end of the year, with the next likely reduction coming in November.

The Pound extended its decline against the Dollar yesterday, dropping 1.0% to a low of $1.7634 on the session, the weakest level since September 12th as yesterday’s data reinforces speculation that policy makers will elect to move early and lower borrowing costs as early as next week.

The implied yield on short-sterling futures contracts for December slumped 29 basis points yesterday while Barclays Plc changed its forecast for the next rate decision and predicted a cut after the data yesterday indicates slowing growth and easing price pressures.

The Euro slumped by the most in seven years against the Pound on Tuesday and the single currency appears vulnerable to reports that at least three European institutions have been the subject of a government bailout this week.

A separate report yesterday showed that manufacturing in the region contracted more than initially estimated as the Purchasing Managers’ Index dropped to a reading of 45.0 in September from 47.6 the previous month.

Elsewhere, unemployment in the region rose a staggering 7.5% in August, the highest since April 2007 as the deepening credit crisis curtailed growth and forced companies to shed jobs.

The Euro-zone economy, which has contracted in the second quarter for the first time since the introduction of the Euro in 1999, has seen confidence diminish as the U.S led financial meltdown spreads to Europe but the European Central Bank will probably resist the temptation to cut interest rates this lunchtime.

The governing council members, led by the Governor Jean-Claude Trichet, are widely expected to hold borrowing costs at the current level as policy makers are apparently more concerned with the threat to price stability despite consumer prices moderating 0.2% in the latest figures for August.

The focus will inevitably fall on the accompanying press conference as investors look for clues on future policy and will be interesting to gauge the ECB’s response to the latest developments in financial markets as the House of Representatives once again vote on the proposed U.S rescue plan.

The Dollar rallied higher against the Euro overnight as we approach the highest level in a year while the U.S currency also made robust gains versus the Pound after the Senate's upper house again approved a $700 billion bailout.

The positive momentum surrounding the Dollar also increased on demand for Dollar funding outside the U.S, which reflects the bank's reluctance to lend to eachother, while the revival of the rescue plan provides some optimism that the U.S will act faster than Europe in addressing the problem with credit markets.

The Euro is struggling this morning amid speculation that the ECB Governor Trichet will say that the shortage in credit reduces the necessity for higher interest rates and Euro buyers may wish to take advantage of the current rate as the Pound approaches the top end of the long established trading range.

The market consensus is that the U.S will eventually pass some kind of bill, while the ECB has yet to announce steps to reduce the volatility that has engulfed financial markets over the past month.

The Dollar beached under $1.40 versus the Euro overnight as the Senate voted 74-25 in favour of the legislation that links the rescue plan for financial institutions to an increase in deposit insurance limits and tax breaks for middle classes.

The House of Representatives will vote today on the revised rescue plan after rejecting an earlier version on Monday and the Dollar's momentum may be curtailed if the members finally agree on the terms of the bailout.

Data Released 2nd October

U.K 07:00 Nationwide House Prices (September)

EU 10:00 Producer Price Index (August)

EU 12:45 ECB Interest Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 26th September)

U.S 15:00 Factory Orders (August)

The increased level of volatility that has engulfed financial markets continued yesterday as the Pound enjoyed the biggest daily move against the Euro in seven years after UK stocks rallied amid reports that U.S lawmakers will salvage the $700 billion rescue plan that was rejected by the House of Representatives on Monday.

The UK currency also recorded its biggest monthly gain against the Euro since January 2005 as global stocks rallied following comments from the Judd Greg, the Senate Banking Committee's ranking Republican.

He was joined by Democratic presidential candidate Barack Obama, who both stated that the bailout will eventually be passed as lawmakers argue over the terms of the rescue plan.

Nevertheless, the delay in the proposed $700 billion bailout that would signal the biggest financial intervention since the Great Depression has seen the Dollar rally significantly against the majors.

The U.S currency closed towards $1.7800 versus the Pound last night after gaining by the most in 15-years on Monday following reports that the UK government seized control of Bradford & Bingley Plc.

However, the overwhelming improvement in sentiment surrounding equity markets is likely to bolster Sterling sentiment against a basket of currencies and the 1.7% rise in the FTSE 100 index helped the Pound breach above 1.2700 versus the Euro last night, before finding support around 1.2630.

The contrasting performance of the Pound against the Dollar saw the UK currency slide 10.3% in value in the third quarter and is poised to record its biggest decline since the final three months of 1992, while Sterling sentiment was further hampered after UK consumer confidence stayed near a record low in September.

The Gfk gauge of sentiment slumped to a reading of minus 32 while the index reached minus 39 in July, which represents the lowest level since the series began in 1974 and signals that the crippling decline the UK credit market is undermining consumers' confidence in the economy.

Elsewhere, a separate report from the Office of National Statistics showed that UK gross domestic rose 1.5% from this stage in 2007 to record the weakest annual pace since 1992 in the second quarter as the escalting financial crisis curtailed business investment, construction and industrial output.

The UK government has seized control of Bradford & Bingley Plc and helped rescue HBOS Plc in September after the crisis in credit undermined lending and worsened the economic downturn but the Bank of England has still refrained from cutting interest rates after consumer prices accelerate at the fastest pace in at least a decade.

The Euro fell by the most since 2001 against the Dollar yesterday while the single currency also recorded sharp losses versus the Pound amid reports that Dexia SA, the world's biggest lender to local governments, required a €6.4 billion lifeline.

The Bank also ousted the chairman and chief executive as the widening financial crisis spreads to Europe and forces the government to intervene and prop up institutions.

The capital infusion for Brussels and Paris based Dexia comes just two days after officials agreed a bailout to the tune of €11.2 billion into Fortis Bank, the largest Belgian financial services company, while Germany also had to rescue Hypo Real Estate Holdings AG on Monday.

European governments are having to step in to protect banks and lenders as the escalating financial crisis drove Lehman Brothers Holdings Inc and Washington Mutual Inc into bankruptcy spreads, while government officials in Ireland have promised that it will guarantee Irish banks' deposits and debts for a two year period.

Elsewhere, the Euro was further undermined as the harmonised index of European consumer prices slowed for a second month in September as the annual pace of inflation fell to 3.6% from 3.8% in August.

The report provides some optimism that the ECB will be able to cut interest rates as inflation moderates in conjunction with the 30% fall in oil prices over the past two months.

The Dollar extended its rally against the Pound yesterday while the U.S currency also consolidated on the recent gains made gains versus the Euro as the delay in the financial rescue plan helped boost sentiment and the decline in commodities saw oil prices fall by the most in 17-years in the third quarter.

Elsewhere, the Dollar remained largely resilient after the U.S Chicago Purchasing Managers' index slowed in September, while house prices in 20 U.S cities declined 16.3% in July to record the fastest downward move on record and signal that the worst housing recession in a generation has yet to peak.

Data Released 1st October
U.K 09:30 CIPS Manufacturing PMI (September)

EU 10:00 Unemployment (August)

U.S 13:30 ADP Employment (September)

U.S 15:00 Construction Spending (August)

U.S 15:00 ISM Manufacturing (September)

written by Adam Solomon