The Pound rises to a high of $1.5500 against the Dollar as a bounce in global stocks increased risk appetite and spurred demand
The Pound resumed its upside momentum against the Dollar yesterday, rising to a high of $1.5510 on the session, while the UK currency also strengthened for a third straight day versus the Euro after a bounce in global stocks helped boost demand for risk appetite and spur demand for higher yielding assets.
Sterling subsequently climbed against 14 out of the 16 most actively traded currencies as the FTSE 100 Index gained 2.1% to record its third advance in three days, while a report from the Nationwide Building Society showed that UK house prices declined less than initial forecasts in November.
A slump in global growth and almost $1 trillion of losses and writedowns at financial institutions has fuelled demand for the relative safety of government backed bonds but the incredible injection of emergency funding by Central Banks worldwide has created an element of risk appetite that will continue to support Sterling in the short-term.
The rally in UK stocks is providing a supportive environment for the Pound and yesterday’s move may also be exacerbated by the lack of the liquidity in the market due to the U.S Thanksgiving Day holiday and therefore Sterling may be unable to sustain this recent momentum due to the deteriorating outlook for the economy.
The Pound has declined nearly 25% in value against the Dollar this year and a further 12% versus the Euro as the global financial crisis and slumping house prices sent the UK economy into the grip of a recession that may last well into 2009 according to recent estimates by the Banking of England.
The Bank’s forecasts confirm that the economy has probably fallen into a recession in the third quarter and the slump in growth is expected to last until the middle of 2009 as policy makers are seemingly prepared to cut interest rates to whatever level deemed necessary in order to revive growth.
The bright side of the Pound’s monumental decline in value does have its advantages as a weaker currency will improve the competitiveness of UK exporters and that should help improve output even as global demand shrinks.
UK house prices have fallen for a 13th consecutive month in November as the ongoing financial turmoil and restricted lending conditions deterred homebuyers, while consumer spending has fallen by the most since 1995 in the third quarter and unemployment rose higher.
The impact of the credit crunch is filtering through to the high street as the decline in spending has culminated in reports that Woolworths Plc placed its stores into administration, while MFI Retail Ltd collapsed and put at risk almost 30,000 UK jobs.
The average cost of a home in Britain fell a further 0.4% from October and an unprecedented 13.9% from this stage in 2007 and although the drop was smaller than anticipated, the report indicates that prices will continue to fall over the coming months as Banks struggle to pass on interest rate cuts to the consumer.
The Bank of England have cut interest rates to 3.0% in November and investors are already factoring in a further 75 basis point reduction on December 4th as policy makers try and revive growth and spur lending.
The Governor of the Bank of England Mervyn King said this week that getting banks to step up lending again “is more important than anything else at present” and that sentiment was echoed by the Deputy Governor Charles Bean, who said that the turmoil in credit market may warrant an aggressive easing in the UK interest rate.
Another member of the Bank’s monetary policy committee, David Blanchflower, also said yesterday that the Central Bank is “reacting to events” by cutting interest rates aggressively now, while proactive reductions earlier in the year would have helped the UK remain ahead of the curve and helped ease the effects of a recession.
Blanchflower was advocating the need to cut interest rates in the first quarter of this year, even as inflation accelerated to the highest level in over a decade, and was pressing for a 50 basis point reduction in October before policy makers eventually joined six other central banks and reduced the benchmark lending rate by half a percentage point.
Growth in the UK economy has contracted in the third quarter as the worst financial crisis since at least the Great Depression saw a sharp decline in consumer spending but Blanchflower’s push for lower rates put him in the minority of the nine member MPC as his colleagues focused on bringing inflation back towards target.
The Euro traded close to a three-week high against the Dollar yesterday as European stocks rallied for a fourth consecutive day and reports in Germany showed that unemployment unexpectedly declined in November.
The rise in risk appetite is supporting the Euro, while the Dow Jones Stoxx 600 Index climbed 2.4% as investors speculated that that ECB’s efforts to shore up banks and the economy will support profits.
In addition, the jobless rate in Germany unexpectedly held at 7.5%, the lowest level in 16-years as the number of people out of work falling 10,000 to 3.15 million, which was lower than anticipated and showed that another area of the economy is withstanding the worst recession in 12-years.
Elsewhere, a separate report from the European Union showed that confidence in the Euro-zone fell to a 15-year low this month even after the aggressive easing in interest rates and government stimulus measures to combat the impact of the financial crisis.
The Pound struggled to consolidate on the previous day's against the majors after UK consumer spending declined by the most since 1995
The Pound rallied to a high of $1.5478 versus the Dollar yesterday and the UK currency also reached a high of 1.1953 against the Euro as government bonds rose and sent the 10-year gilt to the lowest level in almost 20-years following a report that UK consumer spending declined by the most since 1995.
The report from the Office of National Statistics confirmed that business investment also slumped, while gross domestic product posted its first quarterly decline in 16-years to match preliminary estimates on October 24th and the UK stock market plunged for the first time in three days.
The UK economy is so heavily reliant on housing and consumer spending that the reports yesterday will only add to recent evidence that growth has slipped deep into contraction and the Chancellor Alistair Darling pledged £20 billion of tax cuts and spending this week to prevent a drop in lending and rising unemployment from exacerbating the recession.
The government and the Bank of England are working together to restore the flow of credit through the economy but the drop in value added tax may not be enough to revive spending because banks and lenders have so far failed to pass on recent interest rate cuts, while lending conditions remain restricted.
Earlier this month, the Office of National Statistics and the Confederation of British Industry announced that that UK retail sales had declined heavily and yesterday Woolworths Plc, the century old UK retailer, will enter administration tonight, according to a report from the BBC.
Elsewhere, a separate report showed that UK industrial production fell by 1.1% in the official figures for the third quarter and factory output also declined 1.3% to indicate that slump in spending and production will make it increasingly difficult for the government to revive growth.
The Pound declined in the aftermath of the report and endured a volatile session against the major currencies but the Bank of England Deputy Governor Charles Bean said on Tuesday that the Pound’s slide this year is the “right sort of magnitude” as the decline in value is necessary as part of the rebalancing process.
Nevertheless, Bean also added that “there is a distinction between a decline in Sterling that is necessary and one where external investors lose faith in the policy framework the UK operates under and that results in pressure on Sterling.
The Bank of England are actively talking down the Pound as Bean’s comments mirror the tone of Mervyn King’s recent statement and Geoffrey Yu, current strategist at UBS AG, said that there is an inherent risk that the Pound will fall further from its current level as the Bank of England continue cutting interest rates from the current 3.0%.
The decline in UK fundamentals illustrates that the UK economy is in a state of contraction and the global recessionary concerns combined with an aggressive easing in UK interest rates has seen the Pound decline 25% in value against the Dollar this year and the UK currency may struggle to build on the positive momentum earlier this week.
A slump in the global economy and roughly $1 trillion of losses and writedowns at financial institutions due to the credit crisis has fuelled demand for the security of government fixed-income this year, while traders have actively sold high-yielding assets as an element of risk aversion invaded the market.
To that end, the Pound may decline towards 1.1500 versus the Euro over the next quarter as interest rate cuts and a deteriorating budget deficit weighs on sentiment, while investors are speculating on the depth of the cuts with policy makers expected to lower the benchmark lending rate to at least 1.5%.
The Euro suffered a strong intraday decline against both the Pound and the Dollar yesterday amid reports that the European Union will announce a coordinated €200 billion financial stimulus package and said that more may be needed to limit the impact of the current financial crisis.
Many regions within the Euro-zone have already fallen into recession, including Germany, but the proposal yesterday is equivalent to 1.5% of European gross domestic product and is the latest initiative in a series of measures to counter the impact of an economic slump that has essentially shut down lending.
In terms of economic data, inflation in Germany dropped by the most since records began 12-years ago after oil prices plunged from the July high of $147.27 a barrel to just $54.23 by the close of trading in New York and the decline in consumer prices will give the ECB scope to reduce interest rates.
The annual rate of inflation fell 1.5% from 2.5% in October and policy makers are set to reduce rates for the third time in almost two months next week in an attempt to revive the economy from its first recession in 15-years.
The focus this morning will fall on the EC economic sentiment index and the Euro may struggle against the majors for a second day as the report is forecasted to show that consumer and business confidence slipped further into negative territory.
The Dollar rallied higher against the Euro for the first time in four days yesterday as drops in US consumer spending, durable goods orders and new home sales painted a fairly gloomy outlook for the world’s largest economy, creating an element risk aversion in the market as investors sought the security of safe haven assets.
The Dollar also rallied against the Pound in the afternoon session, trading as low as $1.5177 in New York as the deepening U.S recession encouraged investors to sell high-yielding assets in favour of low cost loans in Japan.
U.S consumer spending is the biggest contributor to the economy and reports yesterday showed that sales slipped 1% last month, which was more than initial forecasts, while new home sales fell to an annual pace of 433,000, the lowest level in 17-years.
Elsewhere, orders for durable goods slumped a massive 6.2% in October following a 0.2% decline in September to further emphasise the current recessionary concerns in the U.S economy and that prompted the Federal Reserve to commit up to $800 billion in new funding to help unfreeze credit for homebuyers, consumer and small businesses.
The Pound rises above $1.5279 against the Dollar as a swing in risk sentiment sees investors back high-yielding assets
The Pound bounced back against the majors yesterday, rising above $1.5400 against the Dollar, while the UK currency also rallied from a low of 1.1675 versus the Euro after gains in stocks and an unprecedented injection of liquidity from the Federal Reserve boosted demand for higher-yielding assets.
The surprising momentum surrounding the Pound saw the UK currency climb for a third consecutive day against the Dollar as the Fed’s plan to encourage lending to consumers and revive spending boosted Asian stocks and some European equity markets.
The volatile swings in risk sentiment continues to reverberate through the foreign exchange market and the Pound has become somewhat of a barometer for risk aversion as the UK currency traded higher after the Fed’s commitment provided a sense of stability in financial markets that encouraged investors to move away from safe haven assets.
That notion is reflected in the Pound’s performance yesterday against the Yen and Swiss Franc but perhaps more significantly the UK currency closed well above the major Fibonacci retracement level at $1.5279 and to that end the Pound could gain as much as 10% versus the Dollar, according to Citigroup Global Markets Inc.
Citing charts used to track and predict currency movements, the Bank said that a rally from near the 76.4% Fibonacci retracement level of the Pound’s upward move from the low at $1.4557 to $1.5249 may indicate that Sterling is gathering momentum with investors targeting a possible gain to $1.5950 and latterly $1.6700.
The Pound also bounced from a daily low versus the Euro after sentiment dwindled following the Chancellor’s pre-budget report yesterday where Alistair Darling proposed a plan that would create the largest budget deficit among the Group of Seven industrialised nations as the government struggles to combat a recession.
The proposal was met with cynicism in the market as the Prime Minister’s plan to raise more tax from the highest earners is unlikely to generate enough money because the rich will contribute more to their private pensions, while converting more income to capital gains, wiping out most of the £1.6 billion to government hopes to raise.
The report from the Institute for Fiscal Studies also highlighted that the Labour Party fought that last election on a pledge not to increase the top rate of income tax from 40% and yesterday’s move marks the first increase in the higher rate since the 1970s.
There is also an argument on the actual benefits of lowering value added tax on small businesses and consumers as the government attempts to bolster confidence and increase spending to revive economic growth.
However, struggling companies will be understandably reluctant to pass on the cut to the public and a somewhat minor drop in VAT will probably give a small boost to consumer spending without being sufficient in bringing the economy out of the current slump.
Elsewhere yesterday, UK stocks gained for second day as the FTSE 100 Index rose 0.4% on the session, led by shares in financial firms, after the Bank of England governor Mervyn King said that policy makers are committed to reviving the flow of credit through the economy.
As a nation, the UK is hugely reliant on borrowing as a means to increase spending but the worsening credit conditions has made banks reluctant to step up borrowing despite a significant easing in the UK libor rate.
In a statement to the UK treasury select committee, King said that the most significant challenge to policy makers is to revive the flow of credit and insisted that the Central Bank “should not shy away from recapitalisation if that proves necessary.”
The Bank of England and the government have been working together to revive economic growth with an aggressive easing in interest rates, the biggest budget giveaway since the 1980s and a multi-billion pound government bailout for struggling financial institutions.
The failure to get banks to step up lending again could potentially increase the risk of a period of deflation and King conceded that stoking credit growth is “more important than anything else at present” and when asked about the possibility of nationalising individual UK banks, King indicated he wouldn’t rule out any such move.
The Euro relinquished earlier gains against the Pound yesterday but the single currency rose above 1.3000 versus the Dollar amid reports that German consumer confidence unexpectedly rose for a third consecutive month and defied concerns over a deepening recession.
The Gfk index for December increased to a reading of 2.2 from 1.9 in November despite initial forecasts of a 0.4% drop and the report provides an indication that consumers are taking advantage of the falling price of oil and declines in inflation.
Elsewhere, ECB governing council member Ewald Nowotny weighed into the argument on the severity of the European economic slump and even declared that the Central Bank should refrain from an aggressive cut in interest rates, favouring a wait-and-see policy.
Nowotny was joined by ECB executive board member Lorenzo Bini Smaghi, who urged policy makers to discuss a more measured response to the current economic slump, saying that “sharp” rate cuts may exacerbate negative sentiment.
The Dollar was susceptible to volatile swings in risk sentiment yesterday as the Federal Reserve took the dramatic steps to unfreeze credit markets by committing a further $800 billion in liquidity as the government seizes up to $600 billion in ‘bad’ debt and sets up $200 billion to support consumer and small business loans.
Policy makers are hopeful that the new initiative will finally bring down interest rates on mortgages and consumer loans, offsetting the withdrawal of private sector financing despite the Reserve bank slashing borrowing costs to 1.0% over the past year.
In terms of economic data, the dwindling sentiment for the Dollar as a safe haven asset drove the U.S currency lower versus both the Pound and the Euro as the economy shrank in the third quarter faster than had previously been anticipated.
Gross domestic product contracted 0.5% in the period from July to September to indicate that the world’s largest economy has sunk deeper into recession as the credit crunch, the worsening housing market and rising unemployment caused a fundamental decline in consumer and business confidence.
This week Senior Traders Adam Solomon and Luke Trevail take an in-depth look at the way the currency markets responded to the minutes from the Bank Of England Monetary Policy Committee meeting and Alistair Darling's Pre-Budget Report.
Also this week:
The CitiBank bailout
Further Eurozone resilience
Some optimism for US Dollar buyers
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The Pound declines against the Euro as the Chancellor Alistair Darling pledges to lower VAT but increases the budget deficit to £118 billion
The Pound declined against the Euro yesterday, falling to a low of 1.1714 on the session, after the UK government announced plans to sell a record amount of debt in the next fiscal year, while ten-year gilts snapped four days of consecutive gains as the cost of hedging against losses on government bonds rose to a record high.
In the pre-budget report, the Chancellor of the Exchequer Alistair Darling pledged to introduce the biggest round of tax cuts and spending increases in 20-years in an attempt to counter the UK’s first recession since 1991.
The £25.6 billion stimulus package over the next two years will swell the UK budget deficit to £118 billion in the 12 months through 2010 and at 8% of gross domestic product, the shortfall is the largest since at least 1970 and biggest within the Group of Seven nations.
The UK government is going one step further than his counterparts in the U.S, Europe and Asia as Gordon Brown tries to limit the impact of the worst global recession in 30-years and Britain’s fiscal package also includes a reduction in value added tax by 2.5 percentage points to 15% as the Labour Party try and bolster support in the build up to the election.
The giveaway in VAT is the largest initiative since 1988 when the then finance minister Nigel Lawson provided a boost equivalent to 1.2% of gross domestic product through tax cuts and the so called ‘Lawson Boom’ that followed ended in a housing bust in the early 1990s.
Yesterday’s stimulus package is equivalent to 1.1% of the economy’s value and the plans will force the government to sell a record £146.3 billion of bonds or gilts in 2008 and that represents an incredible 83% increase from the £80 billion planned just eight months ago and that puts into context the extent of the turbulence in public finances.
In order to help pay for the plan, the government also plans to raise the income tax rate for people earning more than £150,000 to 45% in 2011 and former Conservative Chancellor Kenneth Clarke said yesterday that the UK “runs the risk of having foreign exchange markets refusing to believe that the plan is credible and repayable.”
In addition, the Shadow Chancellor George Osborne commented that “this budget is all about the political cycle and not the economic cycle”, indicating that the fiscal stimulus package announced yesterday was designed to win votes rather than combat an economic slump.
Gordon Brown’s handling of the financial crisis has seen the government gain in popularity with some polls showing him narrowly leading the Conservatives in the year through September and the tax cut on higher-income earners is clearly aimed at the more traditional elements of the Labour Party.
However, the Pound failed to find any support against the majors in the aftermath of the report amid concerns that the new measures will not actually provide much of a boost to the flagging UK economy and there is an inherent risk that retailers will not pass on the saving to the consumer.
Alistair Darling also said yesterday that he wants to boost mortgage lending by guaranteeing securities backed by home loans and the plan will be based on findings from former HBOS Plc Chief Executive James Crosby who recommended the government auction roughly £100 billion in guarantees for mortgage back bonds.
According to estimates from the International Monetary Fund, the UK economy will suffer the worst slump of any G-7 nation over the next year as the decade long housing boom turns to bust and growth is forecast to contract 1.3% over the next year, compared to initial forecasts of 0.7% in the U.S and 0.5% in Germany.
The Euro made substantial gains against both the Dollar and the Pound yesterday despite reports in Germany that business confidence in the region slumped to the lowest level in almost 16-years in November as the global credit crisis weighed on demand for exports.
The Ifo Institute said its business climate index dropped to a reading of 85.8 from 90.2 in October, the lowest since February 1993, and the report will increase pressure on the European Central Bank to lower interest rates aggressively when policy makers reconvene next month.
The Dollar declined heavily against the majors yesterday, closing above $1.5150 versus the Pound, as the U.S currency suffered its biggest two-day loss against the Euro this month following reports that Citigroup Inc received a $306 billion government bailout for its troubled assets.
The rescue package protects the bank from further losses in bad assets, while injecting $20 billion of capital and bolstering the stock market value following its 60% plunge last week amid concerns that depositors may start pulling their money and destabilising the bank that operates in more than 100 countries.
The second biggest U.S bank by assets surged as much as 72% in New York in the aftermath of the Treasury’s announcement and in return for the bailout and guarantees, the government will get $27 billion of preferred shares paying an 8% dividend, which is roughly the equivalent of a 4.5% stake in the company.
Elsewhere yesterday, the President-elect Barack Obama warned that the U.S economy is "trapped in a vicious cycle" and the faces the prospect of losing "millions of jobs" unless immediate steps are taken to stimulate the economy and rescue the nation's struggling automakers.
Obama was speaking at a press conference in Chicago and the tone of his statement was almost like a rallying cry or an ommission of the dire state of the economic outlook in the U.S as the President in waiting announced that the New York Fed President Timothy Geithner will be unveiled as the Treasury Secretary in the New Year.
In terms of economic data, the Dollar also came under further selling pressure following reports that existing home sales dropped in October and prices plunged by the most on record as the housing slump shows few signs of abating going into 2009.
Data Released 25th November
U.K 09:45 King, Bean Gieve, Bake and Sentence Testify on Inflation report
The Pound may find some support against the majors depending on the tone of Chancellor Darling's pre-budget report
Following on from last week, the Pound endured another turbulent week against the majors with the UK currency unable to sustain any positive momentum versus the Euro and the Dollar as a sense of risk aversion stalked the market and speculation grew over the prospect of another UK interest rate cut in December.
Nevertheless, the Pound at least stemmed the flow of losses amid suggestions that the Bank of England’s aggressive easing in borrowing costs will eventually enable the UK economy to emerge faster from a recession than initially anticipated.
The UK currency snapped two weeks of declines after the governor of the BoE Mervyn King indicated that interest rates will be cut again from the current 3.0%, the lowest level since 1955, and traders are already speculating on another 75 basis point reduction on December 4th.
The degree of negative data in the UK suggests that the economy is in the grip of a recession that will probably last until 2010 as a fundamental drop in consumer spending and rising unemployment is making it harder for the government to stimulate growth, while the ongoing financial crisis means that bank’s are unwilling to increase lending.
Nevertheless, the Pound actually rallied 0.5% against the Dollar on Friday and briefly rose above 1.1900 versus the Euro despite the release of the minutes from the Bank’s last policy meeting, which showed that policy makers even considered a bigger reduction in November.
Central Banks worldwide are discussing deeper reductions in borrowing costs as the global economy stumbles through a recession and Federal Reserve policy makers predicted last week that the U.S economy will contract through mid 2009, with some members expressing willingness cut interest rates below the current 1%.
A report from the UK Office of National Statistics last week showed that consumer prices rose just 4.5% year-on-year in October, down from 5.2% the previous month, while a separate index of UK retail sales showed that consumer spending shrank 0.1% over the same period.
Both reports were largely better than initial forecasts but sales contracted for the second consecutive month and the UK inflation rate is still well above the government’s 2.0% target but the larger-than-expected drop in consumer costs will give policy makers further scope to cut interest rates in the months ahead.
Elsewhere, UK home repossessions by mortgage lenders rose 12% in the official figures for the third quarter as higher unemployment and shrinking economic growth left an increasing number of home owners unable to pay their debts.
Foreclosures increased to 11,300, compared to 10,100 in the three months through June as the Council of Mortgage Lenders, which represents British home loan providers said that applications to foreclose increased 9% and repossession orders jumped 24%.
The Pound’s trade weighted index rose 0.7% in the past week, according to indexes compiled by Deutsche Bank AG and the world’s largest currency trader predicts that the Pound will head lower against the Dollar this week but the UK currency could make some gains against the Euro with resistance at 1.1992.
Ongoing financial market turmoil, global recessionary concerns and year end factors should all influence market direction this week, while activity level should be interrupted by the Thanksgiving holiday in the U.S and the Chancellor’s pre-budget report this afternoon.
The Pound may find support should the government announce changes to the tax regime that would make repatriating overseas earnings a far more attractive option for UK companies and boost consumer sentiment.
The Chancellor Alistair Darling has the scope to cut value added tax by 2.5 percentage points to the lowest level allowed by the European Union and initial estimates show that the move will cost the treasury roughly £12 billion.
In Europe, there will also be a focus on the scope for a fiscal stimulus response to the deepening economic crisis as the EU is poised to announce the details of an “Economic Regeneration Package” early this week.
Euro-zone fundamentals will probably point to further downside risks to growth in the Euro-region and the single currency may come under further selling pressure against the majors amid suggestions that the ECB will cut interest rates more aggressively that the Bank of England.
The Dollar recorded a third weekly gain against the Euro as a plunge in global stocks increased demand for the security of U.S government debt, while higher-yielding assets such as the New Zealand and Australian Dollar declined heavily amid volatile swings in risk sentiment.
However, the weakening tone of U.S economic data suggests that the U.S recession probably deepened as consumer spending plummeted in October by the most since 2001, while the downturn in business investment saw purchases decline 1% after 0.3% fall the previous month.
The ongoing financial crisis has forced cash strapped consumers to rein in spending, while companies have cut purchases and slashed jobs as the manufacturing sector deteriorates along with housing and service sector growth to indicate that the economy is sinker further into what may be the most severe economic slump in decades.
The Dollar may weaken against the Euro this week and come under some pressure versus the Pound as speculation over a further cut in U.S interest rates will encourage foreign investors to seek higher returns elsewhere, while a barrage of weak economic reports will continue to undermine confidence in the economy.
The Pound was unable to sustain its upside momentum as UK retail sales declined for a second consecutive month
The Pound was unable to sustain the surprising upside momentum against the Dollar from Wednesday as the UK currency relinquished all of the previous day’s gains, falling back under $1.4700 against the Dollar, and not even a smaller-than-expected drop in UK retail sale could limit the decline.
The UK currency also declined by the most in a week versus the Euro, falling to a low of 1.1764 by the close of the European session, as government bonds surged higher and a report from the Office of National Statistics showed that UK retail sales fell for a second consecutive month.
The 0.1% decline in like-for-like sales only served to increase the likelihood that policy makers will cut borrowing costs aggressively in December in an attempt to revive the floundering UK economy as it stumbles through possibly the worst recession since the end of the Second World War.
Nevertheless, the drop in sales was actually less than initial forecasts as shoppers stepped up food shopping in preparation for Christmas and that offset the lower spending on electrical goods and clothing.
Earlier predictions had forecasted that sales would tumble 0.9% from September and it was perhaps a little surprising that Sterling failed to find any support from the figure and continued the downside momentum as Marks & Spencer Group Plc warned that the current business climate is the toughest since the early 1990s.
Therefore, economists expect consumer spending to get a lot worse and rising unemployment will make it difficult for the government to revive growth even as it implements further cuts in borrowing costs and provides tax breaks to low income earners.
The recent rhetoric from a number of BoE policy makers, including the governor Mervyn King, has signalled that the Central Bank even considered cutting the benchmark lending rate below 2.5% in November before a unanimous decision to reduce rates to 3.0%, the lowest level since 1955.
Gains by government bonds subsequently pushed the yield on the two-year gilt to the lowest level in at least 16-years and the worsening economic outlook is likely to weigh heavily on Sterling over the coming months with a number of economists predicting widespread losses for Sterling against a basket of currencies.
The degree of negative sentiment for the Pound was perfectly illustrated in a recent forecast by JP Morgan & Chase Co who said that Sterling will hit $1.2800 versus the Dollar by Spring 2009, while dropping below 1.1000 against the Euro.
Nevertheless, it is not just the Bank of England that are stepping up an aggressive period of monetary easing as Central Bank’s around the world discuss deeper reductions amid a worldwide recession that has been brought about by the worst financial crisis since the Great Depression.
However, there are growing concerns that the UK economy will be unable to spend its way out of a recession and considering that manufacturing only contributes to roughly 15% of gross domestic product, it is becoming increasingly difficult to see a solution, particularly with housing and services in a downward spiral.
As a result, the Pound may drop as low as $1.4500 over the next week and that trend may also continue against the Euro as we approach the all time record low under 1.1600 with a further 50 basis point interest rate cut scheduled for December.
UK stocks also plummeted for a second consecutive day as a record number of U.S jobless claims sparked fears that the global recession is deepening and the Dollar also fell against the Euro as traders speculated that the Senate’s plan to bailout automakers will reduce demand for the security of U.S assets.
The Japanese Yen fell against the Euro and the Dollar as U.S stocks erased earlier losses and encouraged speculation that investors will halt the sale of high-yielding currencies funded by low cost loans in Japan.
That sentiment was emphasised in the performance of the Swiss Franc, which is also considered a ‘safe haven’ asset, as the currency decreased to the lowest level against the Dollar since July 2007 after the Central Bank unexpectedly halved its target lending rate to 1.0%.
However, the Australian and New Zealand Dollar, along with the Canadian Dollar also came under renewed selling pressure against the Pound as the increased appetite for risk aversion still stalks the market.
Concerns over the future of U.S automakers saw the Dollar decline 0.4% versus the Euro as senators reached a bipartisan agreement on a bailout plan that may yet fail to find majority support in Congress.
Elsewhere, initial jobless claims in the U.S climbed to a higher-than-expected 542,000 in the last week as the number of Americans filing for unemployment benefits approached the highest level in 26-years and that reflects the worsening economic outlook.
In addition, an index of leading economic indicators that is used to gauge the future performance of the economy declined 0.8%, while a measure of manufacturing in the Philadelphia region sank to an 18-year low and the reports combined show that the U.S economy is in the midst of a recession that may spark a period of deflation.
Data Released 21st September
EU 09:00 Flash PMI – Manufacturing (November) - Services
The Pound rallied against the majors, rising above $1.5000 versus the Dollar after U.S consumer prices fell by the most on record
The Pound enjoyed a significant intraday rally against the Dollar yesterday, rising as high $1.5247 on the session, before falling back under $1.5000 at the close of trading last night, while the UK currency also met resistance just under 1.2000 versus the Euro following the release of the minutes from the BoE’s last policy meeting.
The Bank’s monetary policy committee slashed UK interest rates by 1.5% earlier this month and the report yesterday indicated that policy makers are willing to cut rates again in an attempt to revive the struggling economy.
There is a growing sense that the Central Bank acknowledge they are well behind the curve on monetary policy and policy makers are ready to be more aggressive in addressing the risks to economic growth as the minutes showed that the MPC even considered a larger reduction in November.
In the aftermath of the report, the Pound remained largely unchanged but through the session the UK currency began to make gains against the majors, climbing 2% versus the Dollar and investors are still adamant that sellers of Sterling should take advantage of the mini revival with further losses likely to come.
According to the minutes, policy makers led by the governor of the Bank of England Mervyn King, discussed the possibility of lowering rates below 2.5% before the MPC voted unanimously to reduce borrowing costs to 3.0%, the lowest level since 1955.
Policy makers limited the reduction to 150 basis points because they wanted to wait for details on the government’s tax plans and assess the effects of the state rescue of a number of struggling financial institutions before another projected 50 basis point cut on December 4th.
A report from the Office of National Statistics earlier this week showed that the annual pace of UK inflation recorded the biggest single drop in at least 11-years last month as the economy contracted and Mervyn King conceded just last week that the Central Bank is prepared to cut rates and prevent deflation from taking hold.
The minutes from the report showed that projections in the UK inflation rate implied that a significant reduction in the lending rate, possibly in excess of 200 basis points, might be required in order to meet the 2.0% inflation target in the medium term.
Consumer prices have risen 4.5% year-on-year in October, compared with 5.2% the previous month and the significant drop has fuelled concerns that a slowing economy will see the economy enter a period of deflation as producer costs also tumble and output prices contract at the fastest pace in 22-years.
Some would argue that policy makers are actively trying to undermine confidence in Sterling as a weaker currency will help bolster growth but MPC member Timothy Besley said yesterday that the weakness in the Pound probably won’t prevent inflation from slipping under the 2% target next year.
The Euro declined on the session against the Pound yesterday but enjoyed a strong intraday move versus the Dollar despite a fairly damning assessment from the ECB President Jean-Claude Trichet, who said that the global economy is experiencing the worst financial crisis since the end of World War Two.
Europe’s economy has fallen in its first recession in 15-years in the third quarter of this year after the credit crisis pushed up lending costs and triggered the collapse of the third largest U.S investment bank Lehman Brothers Plc in what could be considered the worst financial crisis since the Great Depression.
The European Central Bank have lowered interest rates to 3.25% over the past month and the Euro’s momentum against the Pound has stalled amid speculation that the Central Bank will be just as aggressive as the Bank of England in lowering borrowing costs.
The Dollar came under a large degree of selling pressure yesterday as the U.S currency extended its decline against the Pound following reports that U.S consumer prices fell at the fastest pace on record as the cost of living fell and construction began on the fewest number of homes ever last month.
The currency market has been dominated by swings in risk sentiment in recent weeks but yesterday U.S fundamentals came back into focus as the headline consumer price index plunged 1.0% in October, the most since records began in 1947.
The scale of the decline indicates a period of deflation, or a prolonged price slide, which may become another hazard facing the Federal Reserve and that could worsen the economic outlook by making debts harder to pay off and offsetting the positive impact of a series of interest rate cuts.
The Pound declines against the majors as UK inflation falls by the most in 11-years and increases the prospect of a further reduction in rates
The Pound was unable to sustain Monday's momentum against the majors yesterday as the UK currency found strong resistance at $1.5000 against the Dollar and also fell back under 1.1900 versus the Euro as traders speculated that the bounce may have been nothing more than a technical consolidation before a further downside move.
Sterling sentiment was further undermined as former Chancellor of the Exchequer Norman Lamont conceded that the Pound's recent slide will help the UK economy pull out of a recession as long as it doesn't turn into a "run" on the currency, a view echoed by BoE governor Mervyn King, who has publicly refused to rule out cutting interest rates to zero per cent in an attempt to bolster growth.
Lamont was the finance minister during the last currency crisis in 1992 and he said in an interview yesterday that "there are opportunities when a currency depreciates but as so often when you have these situations, what starts as a small move can quickly become a run".
The Pound has lost 24% in value against the Dollar alone this year and has shrank to an all time record low versus the Euro as the monumental decline in value is reminiscent of events in 1992 when Lamont failed to prevent a sell-off in Sterling that eventually pushed the currency out of the European Exchange Rate Mechanism during John Major's tenure as UK prime minister.
JP Morgan & Chase Co have predicted that the Pound will extend its current slump to the lowest level since 1985 with the UK currency forecast to hit $1.2800 versus the Dollar next year and fall as low as 1.0900 against the Euro amid concerns of deepening and prolonged UK recession.
Investors are encouraged to keep selling Sterling as Gordon Brown's government steps up spending and implements a series of tax cuts to boost consumer sentiment but that will only serve to widen the biggest budget deficit since the Second World War.
The UK Treasury has a budget gap of £37.6 billion in the first half of the fiscal year as the government deliver tax breaks to low income earners, increases public spending by £4.8 billion while delaying an increase in fuel duties and helping homeowners with mortgages by removing stamp duty taxes.
Lamont also defended George Osborne in the interview yesterday after the shadow Chancellor was criticised by Gordon Brown for saying that the government risks creating "a proper Sterling crisis" and needed to be more responsible for his comments. Lamont stated that Osborne had been unfairly criticised for his comments as he had only stated what other people had been saying, while he stopped short of reccommending that the UK adopts the Euro as the Pound deteriorates.
The Bank of England have cut UK interest rates below the European Central Bank for the first time since the Euro was introduced in 1999 this month as the benchmark lending rate slides to just 3.0% compared to 3.25% in the Euro-region and investors are anticipating further cuts in the December 4th meeting.
A government report yesterday showed that the UK inflation rate had the biggest drop in at least 11-years in October as consumer prices slowed from 4.5% from 5.2% in September and the Pound declined as the tone of the report gave policy makers further scope to reduce interest rates.
An earlier report from the Confederation of British Industry, Britain's biggest business lobby, indicated that the UK economy will contract the most in almost thirty years in 2009 and despite the Euro-zone entering its first recession since 1999, the Pound is forecasted to register further losses against its European counterpart in the short-to-medium term.
The focus this morning will fall on the minutes from the Bank of England's last policy meeting and the report may provide an indication of how far policy makers are willing to cut interest rates, while traders will also be particular attention to the voting pattern of the nine-strong monetary policy committee.
A unanimous vote to cut rates by 1.5% earlier this month is likely to be negative for Sterling, while a separate report from the CBI should also point to further weakness in the manufacturing sector as industrial orders slump to a reading of -41 in November from -39 the previous month.
The Dollar bounced back against both the Pound and the Euro yesterday amid renewed speculation that overseas investors sought the security of U.S assets as a strong element of risk aversion saturated the market and the global economy entered a recession.
The Dollar index, which provides a measure of the U.S currency against a basket of trading partners, approached the highest level in 2-years before data from the Treasury today that is expected to confirm that overseas investors almost doubled holdings of the nation's securities in September.
The increase in risk aversion and sustained decline in oil prices is likely to be positive for the Dollar in the month's ahead, while the greenback also found support yesterday as U.S producer costs plunged by the most on record in October as the declining outlook for the world economy sapped demand for commodities.
The 2.8% drop in prices was much larger than forecasted and the report precedes a broader measure of U.S inflation this afternoon, which may show that consumer prices also tumbled in October as the cost of living slides by the most in 60 years and helps propel the economy back from the brink of recession.
Once again Senior Traders Adam Solomon and Luke Trevail analyse the news in the currency markets and look ahead to what might happen on the trading floors in the coming week.
This week:
Mervyn King's Comments on Sterling
The Eurozone's economic resistance
JP Morgan's gloomy predictions
If you have any questions or comments about this Podcast please leave a comment below or call TorFX now on 0800 612 9625.
Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound bounces back against the majors amid suggestions that last week's decline was 'overdone'
The Pound bounced back from an all-time record against the Euro yesterday and also rallied from the weakest level in six years versus the Dollar as investors judged its recent declines as excessive considering the increasing likelihood that other central banks will match the pace of the Bank of England’s rate cuts.
The UK currency rose towards 1.1900 against the Euro by the close of trading last night, while the Pound also bounced back above $1.5000 versus the Dollar as Sterling enjoyed the biggest gain of all the 16 most actively traded currencies despite losing 24% against its U.S counterpart this year as the economy heads towards a recession.
There is a growing sense in the market that last week’s decline was overdone and the Pound’s bounce against the Euro was exacerbated by ECB policy maker Axel Weber who said that policy makers may lower borrowing costs beyond the current 3.25% in an attempt to boost the economy.
The declining outlook for the Euro indicates that yesterday’s move may be more than just a consolidation as a technical indicator some traders use to forecast price direction bounced above 30 to indicate a rebound was forthcoming.
The Pound also rallied as much as 2.2% versus the Dollar to record the biggest gain since October 29th despite reports from the Confederation of British Industry that said the economy will contract 1.7% in 2009, while Rightmove Plc confirmed house prices slumped by the most since records began in 2002.
The average asking price for a home in Britain declined 7.1% from this stage in 2007 and the apparent weakness in the economy is reflective in the dwindling value of the Pound and that may prevent the UK currency from sustaining any positive momentum in the market.
UK stocks declined yesterday led by a drop in retailers and construction-related companies after Britain’s biggest business lobby said that the economic slowdown in the UK may be much deeper than earlier than predicted.
According to the report from the CBI, UK gross domestic product will contract 1.7% in 2009, the most since 1980 and the catalyst for the Pound’s decline was the omission from the governor of the Bank of England who conceded that the UK economy is already in the grip of a recession.
Investors are still speculating that the Pound will decline to 1.1000 versus the Euro, while finding support at $1.4000 against the Dollar and therefore buyers of either of these currencies would be well placed to take advantage of the current rate bounce or at least place a stop order to protect against further losses.
According to a chief economist at JP Morgan & Chase Co, the Pound will drop 14% against the Dollar to trough at $1.2800, a level not seen since 1985, and a further 9% versus the Euro as the rising unemployment rate continues to hamper an economic recovery.
The Bank of England have reduced interest rates by 2% between October and November with the current benchmark lending rate is at the lowest level since 1955 and policy makers are expected to cut it another 50 basis points on December 4th with the governor Mervyn King prepared to do ‘whatever is necessary.’
The global financial crisis has prompted banks to scale back lending as the cut in borrowing costs will try and spur capital but mortgage approvals held near a record low in September and house prices have declined by 15% last month, the most since at least 1983, according to the biggest lender HBOS Plc.
In addition, UK unemployment rose by the most since 1992 last month and the BoE is prepared to reduce interest rates as low as necessary to prevent deflationary pressures from becoming entrenched in the broader economy.
The annual pace of UK inflation was at 5.2% in September and is expected to slow to an average of 2.8% in 2009 before dropping to 1.2% in 2010 and the figures released this morning are forecast to confirm that consumer prices slowed for the first time since August 2007.
The Dollar fell against the Euro and the Pound yesterday as a contraction in U.S manufacturing added to recent evidence that the world’s largest economy has fallen deeper into a recession.
Factory production in the New York state contracted in November at the fastest pace on record as a global slump in demand curtailed orders, while sales plunged as the index fell to a reading of minus 25.4 and the report also emphasised that a slump in lending is forcing manufacturers to trim output.
The decline in sentiment is just the latest indication that the economy is shrinking as the Commerce Department reported last week that retail sales fell 2.8% in October, the most on record, signalling that the intensifying weakness will further discourage producers and force them to slash prices.
Elsewhere, the Dollar also came under pressure after Citigroup Inc, the U.S bank with the most employees, plans to cut more than 50,000 jobs over the coming months and cut expenses by up to 20% from their peak as the global economy falls into contraction. Data Released 18th November
The Pound crashes against the majors ahead of the MPC minutes from the Bank of England on Wednesday
Following on from last week, recent negative rhetoric from the Bank of England undermined confidence in the Pound to the degree where Sterling fell to the lowest level on record against the Euro and sank to 6-year low versus the Dollar.
The UK currency suffered its biggest weekly decline against its European counterpart since common currency’s debut in 1999, consolidating just above 1.1600 on Friday, amid mounting evidence that the UK economy is in the grip of the worst recession since the end of the second World War.
The catalyst for the Pound’s monumental decline came on Wednesday as Mervyn King, the governor of the Bank of England, appeared reluctant to rule out the possibility of cutting interest rates to zero per cent, while the rising unemployment rate will make it harder for the UK to spend its way out of a recession.
The Pound also lost an unprecedented 5.1% in value against the Dollar to trade under $1.4600 on Friday and investors will continue selling the Pound until it reaches the major support at $1.4000 as the weakness in the UK economy and falling inflationary concerns gives policy makers the premise to reduce rates further.
According to recent estimates from the Bank of England, the UK economy will contract by an annual 1.8% in the first three months of 2009, while inflation will slow and breach below the government’s 2.0% target as traders continue to drive the price of oil towards $30 a barrel.
In a sense, King’s comments last week were a veiled endorsement for the Pound’s decline to act as a way to revive the struggling economy, while MPC member Andrew Sentence said that the Pound’s slide against the majors will make it easier for manufacturers to cope with a recession.
The Pound’s recent performance against the Euro suggests that the market doesn’t think the European Central Bank will cut interest rates as aggressively as the Bank of England and with UK fundamentals continuing to deteriorate, Sterling weakness is likely to persist over the coming weeks.
In the wake of King’s comments and the subsequent reaction in the market, the Prime Minister Gordon Brown urged the opposition to be "responsible" in commenting on the Pound after an interview with George Osborne in the Time newspaper.
At the G-20 summit in Washington, Brown told reporters that it would not be sensible for him to comment on exchange rates after Osborne, who is responsible for the Conservatives’ economic policy, warned that the government runs the risk of triggering a "collapse" in the Pound.
His comments are the first from a senior UK politician to raise the spectre of a currency crisis that is becoming comparable to those suffered by Britain in 1970s and early 1990s or to indicate that the Pound may suffer a similar fate to that of the Icelandic currency following the collapse of its banking system.
The Pound has lost more than a quarter of its value in just four months, declining from $2.00 in July to less than $1.50 last and the UK currency has dropped 20% against the Euro in the past month, a trend similar to the Pound’s performance versus the Deutsche Mark in September 1992.
In terms of UK economic data, the focus this week will fall on the headline consumer price index on Tuesday and the report is forecast to show a sharp decline from September’s 5.2%, further easing concerns about the upside inflation risks.
In addition, financial markets will also be paying particular attention to Wednesday’s minutes from the Bank of England’s November policy meeting where the MPC slashed interest rates by 1.5%, the single biggest move in 27-years.
The tone and language used in the report as well as the voting pattern should provide further insights into how low the Central Bank are prepared to cut interest rates and the Pound will probably come under further selling pressure in the build up to the report.
The Euro’s momentum against the Pound is showing few signs of slowing despite European stocks retreating for a second successive week as the German economy sank deeper into a recession than initially forecast, the U.S scrapped plans to buy mortgage assets from banks and the declining oil price sent energy shares tumbling.
The European economy is sinking further into its first recession since the introduction of the Euro in 1999 and a number of financial institutions including Deutsche Bank AG and Citigroup Inc say that growth will fall further into negative territory and won’t return until late 2009.
The downturn in sentiment leaves policy makers scrambling to limit the depth of the recession and the ECB is poised to cut interest rates again next month, while other governments are lining up fiscal stimulus problems, their efforts may come too late for the recovery from lagging behind that of the U.S.
The Federal Reserve’s proactive response to the global credit crisis means that the U.S is currently well ahead of the curve compared to Europe and the UK and that is reflected in Dollar’s overwhelming appreciation in the market.
The overwhelming decline in Sterling continues as the UK currency falls to a record low against the Euro
The monumental decline in the value of the Pound shows signs of accelerating as the UK currency slumped to yet another record low versus the Euro, falling to 1.1548 at the close of trading last night, amid mounting evidence that that the UK economy is entrenched in the worst recession since the end of the Second World War.
The Pound also consolidated under $1.5000 against the Dollar for the second day in succession, plunging to a low of $1.4561 on the session and to the lowest level in more than six years following reports that BT Group Plc announced a 6% reduction of its workforce in the year through March.
The U.K’s largest phone company will cut roughly 10,000 jobs out of a workforce of 160,000 in an attempt to improve profitability after reporting a dramatic slide in second quarter earnings, which fell 1.3% to £1.43 billion in the fiscal second quarter.
The alarming increase in the UK unemployment rate has led to speculation that the Bank of England will keep cutting interest rates as the economy slumps and Sterling weakness may persist for another two of three quarters according Geoffrey Yu, a currency strategist with UBS AG, the world’s second largest foreign exchange broker.
The Pound has slumped to the lowest level since June 2002 versus the Dollar and the sour economic outlook in the UK is reflective of the Pound’s recent performance against the majors, a trend that is unlikely to turn over the coming months.
Since reaching a high of $2.1157 earlier in the year, the Pound has lost 25% in value against its U.S counterpart, while the UK currency has also fallen 15% versus the Euro and investors are speculating on the possibility of Sterling sliding to $1.2500 versus the Dollar by March 2009.
The Pound has also recorded another record low versus the Euro and investors are anticipating the market falling below 1.1000 over the coming weeks, which would be equal to its all time low versus the Deutsche mark when taking the old German currency’s value at 1.95583 per Euro, the level at which it was replaced in 1999.
The Pound’s 14-day relative strength index against the Euro, a technical indicator that some traders use to forecast changes in price direction, was at a level of 24.07 yesterday, below the level of 30 that would signal a rebound and the last time the index fell below this threshold, Sterling rallied for eight days starting September 3rd.
Bank of England policy maker Andrew Sentence, who as recently as July spoke about the need to combat inflation, said yesterday that the Pound’s recent slump against the Dollar will make it easier for manufacturers to cope with a recession.
His comments coincide with the recent dovish rhetoric of the chairman Mervyn King and it appears increasingly apparent that the Central Bank is waiting to see how low the Pound can go before the market will require intervention.
Elsewhere, the Chancellor of the Exchequer Alistair Darling echoed the gloomy outlook for the economy and he will forecast in his pre-budget report later this month that the recession won’t be over until at least 2010, the Independent reported him as saying in an interview this week.
Despite the government’s initial optimism, the UK is headed for the steepest and most prolonged recession out of the G-7 countries, while the Bank of England look set to implement the sharpest cut in interest rates with some investors speculating on the possibility of zero per cent by the end of 2009.
The strong element of risk aversion that is beginning to saturate the market also saw the Australian and New Zealand Dollar decline heavily against the majors, while UK stocks also dropped for a third consecutive day and oil prices slumped, as traders sought the security of safe haven assets.
Crude oil prices fell to a daily low of $54.67 in New York and traders are betting on the price hitting an unprecedented $30 for February delivery despite threats from OPEC, the supplier of about 40% of the world’s oil, to cut output and revive prices from the lowest level in nearly two years.
The Euro’s advance against the Pound shows few signs of abating but the single currency also made unlikely gains against the Dollar yesterday despite reports that the German economy entered the worst recession in at least 12-years.
Gross domestic product in Europe’s largest economy contracted by more than initial forecasts to a seasonally adjusted 0.5% from the second quarter and the last time that growth fell this far into negative territory over two consecutive quarters was in 1996.
The Euro initially came under pressure in the aftermath of the report, dropping to a low of $1.2388 versus the Dollar amid speculation that the ECB will have little option but to lower interest rates from the current 3.25% and the IMF predicts that G-7 economies will contract simultaneously next year for the first time since World War two.
Data Released 14th November
EU 10:00 Flash GDP (Q3)
EU 10:00 Harmonised Index Consumer Prices (Final – October)
U.S 13:30 Export / Import Prices (October)
U.S 13:30 Retail Sales (October)
- Ex Autos U.S 14:55 Michigan Sentiment (November Prelim)
The Pound plunges to new depths against the Euro, falling under 1.2000 for the first time on record following King's comments
The negative sentiment surrounding the Pound took on a fresh impetus yesterday as the UK currency slumped to a fresh record low against the Euro and breached below the $1.5000 level versus the Dollar for the first time since 2002 after the Bank of England indicated that policy makers will keep reducing interest rates.
The Pound also plummeted against the lower-yielding currencies as a strong element of risk aversion crept back into the market, which was evident with the reaction in the U.S stock market as the Dow Jones sank towards the October lows.
The statement from the Bank of England also indicated that the annual pace of UK inflation will slow “well below” the 2.0% target over the coming months and that will provide policy makers with yet further scope to slash interest rates from the current 3.0%.
When asked by reporters yesterday whether policy makers would take rates to zero, King replied that the MPC “are prepared to cut the bank rate to whatever level is necessary” in order to prevent a recession from fuelling deflationary pressures and bring inflation back towards target.
The Bank’s monetary policy committee elected to slash interest rates on two occasions over the past month, reducing the benchmark lending rate by 1.5% in November to the lowest level since 1955 and yesterday’s omission from Mervyn King suggests that they are well behind the curve and quick action is necessary.
The declining outlook for the UK economy is putting the Pound under massive selling pressure as a government report yesterday showed that unemployment claims rose to the highest level since March 2001 and added to recent evidence that the economy is entrenched in a recession.
The number of people out of work and claiming benefits has increased 36,500 to 980,900, the single biggest monthly increase in 16-years, and the report follows a pretty gloomy assessment by the Prime Minister Gordon Brown, who said that the nation should prepare for the worst as the economy stumbles towards contraction.
His comments mark a shift in tone for the government, which has maintained for the better part of a year that the UK is better placed than other nations to cope with the global credit slump but now it seems that Brown is preparing voters for a deep and prolonged recession.
The downturn in sentiment has deteriorated exponentially over the past month and the subsequent increase in the unemployment rate has fuelled concerns that over 2 million will be out of work and claiming benefits by Christmas and that has caused a significant decline in retail sales.
Therefore, consumer spending is unlikely to be strong enough to boost growth over the coming months, while the overwhelming slump in home values and tighter lending restrictions means that the UK economy will be unable to spend its way out of a recession.
The Pound has subsequently declined against the majority of the majors and after breaking through the major support at 1.2200 versus the Euro, the UK currency appears poised to make further losses after recording a low of 1.1905 by the close of trading last night.
UK stocks also slumped for a second consecutive day, led by a drop in commodities and the dwindling sentiment surrounding the outlook for the economy may see the Pound consolidate under $1.5000 versus the Dollar as traders look for the security of safe haven assets.
The Euro is gathering in momentum against the Pound but the single currency made further losses versus the Dollar as European industrial production declined by the most in almost seven years in September.
Factory output in the 15 nations that make up the Euro-zone fell 2.4% from this stage in 2007 to record the biggest annual decline since February 2002 and there is little prospect for an improvement as the economy stumbles through the first recession since the Euro’s introduction in 1999.
As the economic outlook deteriorates, the European Central Bank have reduced interest rates by one percentage point already over the past two months and the prospect of a further reduction has been improved following the dramatic slump in oil prices that is feeding through to the broader economy.
The Pound again slumps to a record low versus the Euro after UK home sales plummet and add to evidence that the economy is in a recession
The negative sentiment surrounding the Pound is gathering momentum as the UK currency registered further declines against the Dollar yesterday and plunged to yet another record low versus the Euro after UK home sales slumped and added to recent evidence that the economy is falling deeper into a recession.
The Pound also declined against the Yen as an element of risk aversion crept back into the market and investors sought the security of lower yielding assets, including the Dollar, while UK fundamentals again painted a gloomy picture for the outlook for economic growth.
The report from the Royal Institution of Chartered Surveyors showed that property sales plunged to an average of 10.9 in the last quarter, the fewest amount since the series began in 1978.
The RICS index also showed that a much higher percentage of agents reporting falling prices exceeded those reporting gains, a ratio that has been negative since August 2007, while a separate gauge of the report indicated that UK retail sales plunged for the first time since 2005.
The Bank of England have slashed interest rates from 5.75% at the beginning of 2008 to just 3.0% in November but a cohesive effort to lower borrowing costs in October preceded the single biggest cut in rates since 1983, bringing the UK benchmark lending rate to lowest level since 1955.
The escalating financial crisis has led to heightened concerns that the UK economy will enter a deep and prolonged recession but the unprecedented injection of liquidity and a 2.0% drop in interest rates is designed to revive growth and spur lending.
The dramatic reduction has already prompted banks to significantly lower the libor rate, while lenders have bowed to pressure from the government to pass on the cut to their clients and boost the floundering UK mortgage market.
Even so, the general lack of mortgage finance remains a major stumbling block in the revival in the housing market as prices extended declines in all 12 of the major regions monitored by the Royal Institution of Chartered Surveyors.
Falling house prices and the rising jobless rate are encouraging consumers to rein in spending as retail sales fell an annual 2.2% in October to record the first decline since April 2005.
The Pound subsequently declined against the majority of the 16 most actively traded currencies and the UK currency continues to test the major support at 1.2200 versus the Euro and with very little appetite for Sterling above 1.2300 further declines are likely.
The focus this morning will fall on the Bank of England's quarterly inflation report and with producer and consumer prices receeding, the report is expected to reflect the overwhelming drop in oil prices in the three months through October.
In addition, UK stocks also dropped for the first time in three days in the aftermath of the reports as the FTSE dropped 3.6% on the session and the index has lost 34% in value this year alone and is poised for its worst year on record.
The Euro continued to make robust gains versus the Pound yesterday but the single currency struggled to consolidate on the short-term momentum versus the Dollar despite reports in Germany that investor confidence unexpectedly rose in November.
The ZEW Center for European Economic Research said that its index of investor and analyst expectations increased to minus 53.5 this month from minus 63 in October and investors had expected the reading to remain unchanged at close to the lowest level on record.
Nevertheless, investor sentiment has remained in negative territory for the 16th consecutive month in November, which suggests that the pessimistic view surrounding the outlook for the economy continues to outnumber those reporting optimism.
The European Central Bank have lowered interest rates by half a percentage point over the past month in an attempt to bring the economy back from a technical recession and ECB member Guy Quaden said yesterday that he expects further cuts over the coming months. Data Released 12th November
The Pound slumps to a fresh record low against the Euro after UK home sales plunge to the lowest level in at least thirty years
The Pound slumped to a fresh record low against the Euro yesterday and the UK currency also recorded sharp losses versus a basket of currencies, including the U.S Dollar, as an industry report confirmed that UK home sales dropped to the lowest level in at least thirty years.
According to the report from the Royal Institution of Chartered Surveyors, property sales plunged to an average of 10.9 home in the last quarter, the fewest amount since the series began in 1978.
The RICS index also showed that the percentage of agents reporting falling prices exceeded those reporting gains by 82 points, an indicator that has been negative since August 2007, while a separate gauge of the report indicated that UK retail sales plunged for the first time since 2005.
The Bank of England have slashed interest rates from 5.75% at the beginning of 2008 to just 3.0% in November but a cohesive effort to lower borrowing costs in October preceded the single biggest cut in rates since 1983, bringing the UK benchmark lending rate to lowest level since 1955.
The escalating financial crisis has led to heightened concerns that the UK economy will enter a deep and prolonged recession but the unprecedented injection of liquidity and a 2.0% drop in interest rates is designed to revive growth and spur lending.
The dramatic reduction has already prompted banks to significantly lower the libor rate, while lenders have bowed to pressure from the government to pass on the cut to their clients and boost the floundering UK mortgage market.
Even so, the general lack of mortgage finance remains a major stumbling block in the revival in the housing market as prices extended declines in all 12 of the major regions monitored by the Royal Institution of Chartered Surveyors.
Falling house prices and the rising jobless rate are encouraging consumers to rein in spending as retail sales fell an annual 2.2% in October to record the first decline since April 2005.
The Pound subsequently declined against the majority of the 16 most actively traded currencies and the UK currency continues to test the major support at 1.2200 versus the Euro and with very little appetite for Sterling above 1.2300 further declines are likely. Data Released 11th November
The Pound recorded the biggest weekly loss against the Euro since December 2004 after the Bank of England slashed interest rates 1.5%
Following on from last week, the Pound suffered its biggest weekly decline against the Euro since December 2004 after the much larger-than-forecast interest rate cut by the Bank of England increased concerns that the UK economy is heading for prolonged and deep recession.
The UK currency also posted a weekly drop versus the Dollar after policy makers, led by the governor, Mervyn King, reduced borrowing costs to 3.0% in an unprecedented move to bring interest rates to lowest level since 1955.
The deteriorating credit conditions and alarming weakness in UK fundamentals has led to speculation that growth in the UK economy will drop 1% in 2009 and investors are already expecting further interest rate cuts over the coming months amid suggestions that rates will reach 2.0%.
The global easing of monetary policy is just the latest initiative to stem the impact of the 15-month credit crisis as it inflicts definitive blows to economic growth and inflation but policy makers may be fighting a losing battle as banks struggle to pass on the reductions to households and companies.
However, HBOS Plc and three other banks that share a monopoly of the UK’s mortgage market finally slashed rates on Friday after government ministers urged them to pass on the cut in borrowing costs in an effort to revive the floundering UK property market.
The Royal Bank of Scotland Group Plc, Northern Rock Plc and the Nationwide Building Society also reduced their standard variable rates by 1.5% and it is no coincidence that these particular institutions relented to pressure considering all have agreed to sell stakes to the government.
Reports last week showed that UK service sector growth, which accounts for over two thirds of gross domestic product, fell deeper into negative territory last month, while industrial production and factory output had its longest streak of declines for almost thirty years.
Nevertheless, in the wake of the Central Bank’s 1.5% drop in UK interest rates, the FTSE 100 index advanced for the first time in three days led by an increase in British Airways Plc and Marks & Spencer Group Plc.
Despite some easing in financial market volatility, sentiment is likely to remain tentative over the coming week as risk aversion remains the dominate force in the market with investors focusing on the gloomy outlook for economic growth.
The Veteran’s Day holiday in the U.S on Tuesday may mean that trading gets off to a slow start this week, while investors will also be looking ahead to the weekend’s G-20 financial summit for further direction.
The Pound could struggle to stem the losses against the majors this week as Wednesday’s release of the Bank of England’s latest quarterly inflation report, which should reflect the dovish tone of last week’s policy statement and perhaps give an indication on how much lower rates could go.
Although the Euro has risen sharply against the Pound, the single currency could make further losses versus the Dollar on demand for the so called safe haven assets but with the ECB interest rate decision out of the way, the focus will shift back towards data releases.
The European Central Bank elected to lower interest rates by 50 basis points last week and in the accompanying statement, the chairman Jean-Claude Trichet, reiterated concerns that the Euro-zone economy is heading deeper into a recession.
The preliminary estimates for economic growth in the third quarter should confirm a technical recession with the economy forecast to contract by a further 0.2% and a plethora of ECB speakers are likely to echo the tone of comments at last week’s post meeting press conference.
Elsewhere, European stocks resumed their losses in the aftermath of the policy decision as the cut in rates failed to ease concerns that the economy and corporate earnings will deteriorate going into 2009.
The Dollar may have lost some of its appeal over the past week but the allure of the U.S currency is still strong in an environment of risk aversion where traders look to sell high yielding currencies in favour of low cost loans in Japan.
In terms of economic data, the Dollar also stood firm on Friday despite reports that the U.S unemployment rate rose to the highest level since 1994 as companies slashed payrolls and increased the prospect of the steepest economic decline in at least 30-years.
The rising jobless rate increased 6.5% in October from 6.1% the previous month, while employers cut 240,000 jobs, despite initial forecasts of a 180,000 decline, to register the biggest two-month slide since 2001.
Rising unemployment combined with other signs that the economy contracted last month has put pressure on the new U.S President elect Barack Obama to quickly name his economic team and spur congressional Democrats to announce a second fiscal stimulus package.
In the aftermath of Obama’s historic victory in the U.S Presidential election, U.S stocks and commodity markets declined, while the Dollar also came under some pressure amid suggestions that Democrats have previously allowed the U.S currency to decline in order to prop up the economy.
The Pound rallies higher against the Euro after the Bank of England slash interest rates by an unprecedented 1.5%
The Pound rose higher against the Euro yesterday, touching a high of 1.2492, after the Bank of England cut UK interest rates by a much greater-than-forecast 1.5% to bring the benchmark lending rate to the lowest level since 1955 and fuelled optimism that the faltering economy will recover faster than expected.
In the aftermath of the announcement, UK stocks plunged and government bonds gained as the Central Bank’s monetary policy committee, led by the governor Mervyn King, slashed rates to just 3.0% despite preliminary forecasts of a more reserved 50 basis point reduction.
The subsequent positive momentum surrounding the Pound is hardly surprising since financial markets are now looking to reward proactive central banks and the move may trigger a prolonged period of upside Sterling momentum against the Euro, particularly in an environment dominated by risk aversion.
Prior to yesterday’s dramatic easing of rates, the UK economy had the highest interest rate in the Group of Seven industrialised nations but a 150 basis point reduction means that the Pound is now considered a lower yielding currency and therefore lower risk than the Euro.
Recent estimates from the European Commission suggests that the struggling UK economy may contract 1% in 2009, while falling a further 0.5% in October alone to signal the first recession since the early 1990s, while the vulnerability in the global banking system meant that policy makers had to act aggressively.
Nevertheless, the Bank’s decision to lower borrowing costs to 3.0% means that the economy is likely to recover quicker and policy makers are hoping that banks will pass on the reduction in rates to the consumer and revive the UK property market as house prices have fallen 13.7% in the last quarter from just a year earlier.
The extent of the reduction was the biggest one step rate cut since September 18th 1992 and the aftermath of Britain’s ejection from Europe’s exchange rate mechanism that was the precursor to the Euro.
The Pound extended its advance against the single currency after the European Central Bank also lowered interest rates in the midday announcement but the market was seemingly disappointed that policy makers only cut rates by the anticipated 50 basis points.
Global policy makers are escalating their response to the worldwide credit crisis after a cohesive round of rate cuts in October but the ECB’s reluctance to lower its main refinancing rate from the current 3.25% saw the Euro decline against the majority of the major currencies.
In the accompanying statement, the Euro continued to decline against the Dollar, Yen and Pound as the ECB chairman Jean-Claude Trichet said that the European economy “weakened significantly” in the last quarter and the IMF cut growth forecasts in the region.
The single currency slumped to a two week low versus the Dollar as Trichet also said that more reductions are likely to follow and today’s price action seems to indicate that the U.S Federal Reserve is ahead of the curve in monetary easing after slashing interest rates by 325 basis points over the past year.
The Euro declined 1.7% to $1.2740 in the afternoon session, having weakened 20% since climbing to a record high in July but Trichet also confirmed that the ECB’s governing council members discussed a 75 basis point reduction before agreeing that 50 basis points would be sufficient in October.
Policy makers have been reluctant to lower interest rates this year as the annual pace of inflation rose to more than double the Central Bank’s target but Trichet acknowledged yesterday that “in such an environment, price, cost and wage pressures should moderate.”
In the latest numbers, inflation in the Euro-region slowed to 3.2% in October after reaching a 16-year high of 4.0% in July as oil prices have halved from an all time record high of $147 a barrel in July.
In aftermath of Trichet’s comments, economists predict that the ECB will cut borrowing costs at the most aggressive pace in its 10-year history and reduce rates to 2.5% by April 2009 as the economy sinks further into a recession.
The Dollar was largely to reactive to events overseas yesterday but the feel good factor from Barack Obama’s historic victory in the U.S Presidential election was short-lived as U.S stocks and commodities continued to plummet.
In terms of economic data, the Dollar remained largely unmoved as U.S non-farm productivity growth slumped for the third consecutive quarter, while a separate report from the Labour Department showed that U.S jobless claims hit a 25-year high.
The focus today will inevitably fall on the monthly U.S employment report and considering the sharp rise in the jobless rate over the past month, non-farm payrolls are expected to decline by 185,000 with the unemployment rate rising to 6.3%.
The Pound made gains against the Dollar yesterday as the U.S currency retreated in the wake of Barack Obama's historic victory
In the wake of Barack Obama’s history victory in the U.S Presidential Election, global stocks and commodity markets retreated for the first time in seven days after disappointing earnings growth overshadowed speculation that the new President elect will boost the U.S economy with a stimulus package.
UK stocks fell for the first time in seven days amid concerns that the new U.S administration won’t be able to avert a global economic slowdown and the FTSE 100 Index lost 2.3% on the session as the feel good factor from Obama’s victory is unlikely to filter through to struggling financial markets.
Nevertheless, the Pound rallied against the majors and made unlikely gains against the Dollar, rising for a second day against its U.S counterpart, but falling back under 1.2300 versus the Euro at the close of trading last night despite suggestions that a cut in UK interest rates will bolster the economy that hangs in the grip of a recession.
Investors widely expect the Bank’s monetary policy committee to lower the benchmark lending rate by a further 50 basis points this lunchtime and the Pound has been under an increasing amount of pressure following speculation of a greater percentage cut.
According to a Credit Suisse Group AG index of probability, based on overnight indexed swap rates, policy makers could go to 75 basis points in an unprecedented action to relieve an economy that has been battered by the global credit crisis.
However, that proactive attitude goes against the recent actions of the Bank of England and the speculation over a larger cut could see the Pound rally in the aftermath of today’s announcement as an element of risk appetite returns to the market.
The BoE may ignore pressures for a 75 basis point reduction and take into account the rigidly high rate of consumer price inflation, which still remains more than double the government’s 2.0% target, even as the price of raw materials declines from the all time record highs.
The Pound rose to a high of $1.6196 on the session while the UK currency also registered gains against the Australian and New Zealand Dollar despite separate reports that UK factory production extended the worst streak since the early years of Margaret Thatcher’s administration.
Manufacturing output slumped a further 0.8% in September to record the biggest drop in almost two years and the time production declined for seven consecutive months was during the recession of 1980.
Elsewhere, a report from the Chartered Institute of Purchasing and Supply showed that UK service sector growth contracted by the most since 1996 with the index falling to the lowest level in its 12-year history as the economy headed into possibly the worst recession since the end of the Second World War.
The degree of instability in the UK banking system is now filtering through to the broader economy and the dire tone of the reports released yesterday will only put further pressure on the Bank of England to step up an aggressive easing in monetary policy.
The Euro looks poised to revisit the strong resistance around the all time record low of 1.2218 versus the Pound, while the single currency has also bounced back strongly versus the Dollar amid speculation that an ECB rate cut this afternoon will bolster the broader economy.
The European Central Bank have all but confirmed that the governing council, led by the Chairman Jean-Claude Trichet, will slash borrowing costs by a further 50 basis points this month in order to provide some relief to banks and stimulate the economy.
It was difficult to ignore the jubilation surrounding Barack Obama’s election victory yesterday but there was also widespread concern on Wall Street that his appointment as President may start another round of profound Dollar weakness.
Historically, a Democratic government tends to allow the U.S currency to decline in order to help the economy but the new administration could also put renewed pressure on the Japanese Yen and Chinese Yuan to appreciate in order to help the U.S economic recovery.
Obama inherits an economy facing the worst financial crisis since the Great Depression in the 1930s and the Federal Reserve has already cut interest rates by 325 basis points over the past 14 months, while injecting $700 billion in emergency funding to bailout struggling financial institutions.
U.S stocks tumbled and the Dollar declined against the majority of the majors as a contraction in services and further slump in company job losses increased speculation that Fed policy makers will cut interest rates to just 0.5% next month in a last ditch attempt to end the current crisis.
The Institute of Supply Management’s non-manufacturing index, which covers almost 90% of U.S gross domestic product, fell below economists’ forecasts to a reading of 44.4 in October as the record drop was exacerbated by tighter credit conditions and slowing consumer spending.
The dwindling consumer sentiment and economic deterioration was the catalyst in the wave of discontent with Republican rule that eventually swept Barack Obama to victory in the U.S Presidential election yesterday but spending by consumers and businesses will continue to decline over the coming months.
The Pound plunges against the majors after UK construction contracts at the fastest pace in more than a decade
The Pound slumped to fresh weekly low against the Euro yesterday, dropping towards 1.2300 by the close of trading last night, while the UK currency also endured a choppy day’s trading versus the Dollar, falling to a low of $1.5608 in early trade before rising back towards $1.6000 on the U.S Presidential election day.
The UK currency has declined for three straight days now against the Euro and the latest downside move was instigated by a government report that showed UK construction contracted in October, giving the Bank of England yet more reason to cut interest rates aggressively over the coming months.
The slump in the building industry, which currently accounts for just 6% of UK gross domestic product, contracted at the fastest pace in more than a decade and just perpetuates the view that the economy is in the depths of a recession.
The UK government have taken decisive steps to alleviate the financial crisis, injecting more than £37 billion in emergency funding to struggling banks and lenders and the Bank of England’s monetary policy committee will probably cut rates by a further 50 basis points this week in the latest move to provide stability.
Policy makers cut the benchmark lending rate of October 8th in conjunction with six other major central banks in an effort to avoid a collapse of the global financial system and the Pound is under a great amount pressure amid speculation that the MPC will slash rates by more than half a percentage a point.
Nevertheless, despite the dwindling sentiment surrounding the Pound and the outlook for the economy, UK stocks advanced for a sixth straight day, lifting the FTSE 100 Index to more than 20% from its 2008 low as gains in retailers led the surge following reports that Marks & Spencer Group Plc first half net income beat analyst estimates.
A recent report from the Office of National Statistics showed that the UK economy fell into negative growth for the second straight quarter in the three months ending in September and the European Commission predicted this week that UK growth will contract 1% next year.
The recent revival in risk appetite is doing little to support Sterling sentiment as the allure of the Pound as a high yielding asset is dwindling with the prospect of an aggressive easing of interest rates down to 2.0% by the end of next year.
The dwindling sentiment for Sterling was perfectly portrayed in the currency’s performance against the Australian Dollar despite the earlier cut in interest rates, which exceeded earlier expectations.
The Australian Central Bank slashed borrowing costs by a larger 75 basis points, the third reduction in as many months, despite analyst’s predictions of a more reserved 50 basis point cut but the Pound was unable to take advantage, slipping below 2.3000 from 2.3707 earlier in the day.
Elsewhere yesterday, the Royal Bank of Scotland Group Plc, one of the banks nationalised by the government during the credit crisis, abandoned its full year profit forecast as the losses linked to the collapse of the U.S subprime mortgage market escalated and ‘bad’ debt increased.
The Bank said yesterday that it had wrote down £1 billion in the month of October alone against assets tied to Lehman Brothers Holdings Inc and the collapse of the Icelandic banking system.
The resurgence in the Euro continued to gather momentum yesterday as the single made widespread gains against the majors despite reports that European producer prices slowed more than anticipated in September.
The so called factory-gate measure of inflation rose 7.9% from a year earlier after increasing 8.5% in August and the decline in prices mirrors the plunge in oil prices over the same period, which have fallen a third since the all time record high in July.
Easing inflationary pressures is giving the European Central Bank the scope to cut interest rates as policy makers look to limit the damage from the global credit crisis and spark a revival in interbank lending.
In the build up the U.S Presidential Election, the Dollar fell by the most against the Euro since the single currency’s introduction in 1999, while the revival in risk appetite and the thaw in money markets reduced demand for the security of U.S assets.
U.S stocks gained yesterday in the biggest election day rally since 1984 with the S&P 500 Index closing above 1,000 for the first time in almost a month, increasing 4.1% on the session as the speculation surrounding the outcome of the election continues to support risk.
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The Pound declines heavily against the majors after UK manufacturing contracts for the sixth consecutive month in October
The recent revival in risk appetite continues to be the dominate force driving the foreign exchange market but the Pound declined heavily against the majors yesterday, falling well under $1.6000 against the Dollar and recording a daily low of 1.2414 versus the Euro.
The allure of the Pound as a high yielding currency is diminishing with the prospect of another 50 basis points reduction in UK interest rates on Thursday but UK stocks and government gilts rose amid speculation that a reduction in borrowing costs will bolster the economy that has been battered by the global credit crisis.
The increase in ten-year notes prompted the gains even as stocks in Europe and the U.S also advanced but the Pound is likely to extend its recent decline across the board as investors speculate on UK interest rates falling to 2.5% by February next year.
The Monetary Policy Committee, led by the governor Mervyn King, are poised to cut rates on November 6th to provide some relief to the UK banking system, while recent economic data indicates that the economy is in the grip of a recession and will probably contract 1% over the next year.
However, it is still unclear whether banks and lenders will pass on the reduction in rates to consumers as HSBC Holdings Plc defied calls from Gordon Brown to revive lending and even signalled that it probably won’t pass on the full impact of rate cuts to consumers and businesses.
David Hodgkinson, who is the CEO of Europe’s largest bank, said in a statement yesterday that banks globally are re-evaluating mortgage rates but reiterated that current credit conditions adequately reflects the risk.
In terms of economic data, the Pound also came under further selling pressure as a report from the Chartered Institute of Purchasing & Supply showed that manufacturing contracted for the sixth consecutive month in October.
The index of industrial output slumped to a near 16 year low as the global slump in financial markets sapped demand from overseas investors and piled on the pressure for the Bank of England to step up an aggressive easing in interest rates.
UK manufacturers are cutting output and scaling down production, while the unemployment rate continues to rise higher and the ongoing financial crisis wipes out the benefits of cheaper oil and a weaker Pound.
The Pound fell to a low of $1.5863 yesterday and investors are compelled to sell the UK currency even as an element of stability returns to global financial markets and traders back high yielding currencies funded by low cost loans in Japan.
Central Banks around the globe have taken decisive action to calm the credit crisis amid the government’s decision to take control of the Royal Bank of Scotland and HBOS Plc as part of a £37 billion rescue package and the governor Mervyn King said yesterday that the measures will help unfreeze credit markets.
The Euro recorded substantial gains against the Pound yesterday despite reports from the European Commission that showed the region’s economy probably slipped into a recession this year, which will probably continue in 2009 and increase the pressure on political leaders to collaborate on measures to end the crisis.
Economic growth in the Euro-zone will slump 0.1% next year, the worst performance since 1993, and European finance ministers met yesterday to try and overcome the worst financial crisis since the Great Depression in the 1930s.
The European Central Bank are expected to lower interest rates by half a percentage point this week, which would prove to be the fastest round of interest rate cuts in its 10-year history, while the chairman Jean-Claude Trichet has announced a record amount of lending to banks in attempt to bring some stability to the market.
The focus today will inevitably revolve around the U.S Presidential Election later this evening and the Dollar may continue its momentum against the majors even as the U.S economy stumbles into possibly the worst recession in over 25-years.
The Dollar also found further support as crude oil prices retraced $3 in New York following the decline in manufacturing output, which contracted at the fastest pace in 26-years in October as tighter credit conditions and global slump in growth eroded the attraction of U.S exports.
The Pound declines against the majors ahead of the Bank of England interest rate announcement on Thursday
Financial markets remain very volatile as the aggressive swings in risk sentiment continues to dominate ahead of a massively significant week as the U.S presidential election takes centre stage and the outcome may alleviate some of the uncertainty as investors will be looking for the potential impact this has on stocks.
The Pound declined heavily against the Dollar towards the end of last week, falling back towards $1.6000 by the close of trading on Friday to record the biggest monthly decline in 16-years in October.
The UK currency also relinquished earlier gains versus the Euro after a gauge of UK consumer confidence slumped by more than anticipated last month, adding to recent signs that the UK economy is in the grip of a recession.
The Pound snapped a previous three-day winning streak against the Dollar and the difference between two and 10-year government bond yields widened to the most in 12-years after an index of consumer sentiment slid to close to the weakest level since records began in 1974.
Central Banks around the world continue to take measures to ease the escalating financial crisis and limit recessionary concerns and this Thursday the Bank of England are expected to lower UK interest rates by a further 50 basis points, bringing the benchmark lending rate to 4.0%.
Ahead of the announcement, the BoE governor Mervyn King gives evidence, alongside the Chancellor Alistair Darling, on the banking crisis to the UK’s Parliamentary Treasury Committee and his comments will be closely analysed for any hints on monetary policy.
According to BoE policy maker and staunch dove David Blanchflower, the looming inevitability of a recession warrants an aggressive easing in monetary policy and the Pound is likely to come under further pressure in the build up to the announcement amid speculation of a greater cut.
The resurgence in risk appetite last week saw the high yielding currencies make widespread gains against the majors but the removal of interest rate support will also hurt Sterling, even as the Australian Central Bank also slashes rates this week.
The degree of confidence returning to global financial markets has also seen a modest revival in equities and stocks but commodities have posted the biggest monthly drop since at least 1956 amid concerns that a slump in global growth will sap demand for raw materials.
The UK currency has declined 9.2% against the Dollar over the past month, the steepest monthly decline since 1992 and a number of key indicators predict that the Pound will continue to drop towards the $1.4000 levels in the short-to-medium term.
The Euro has also declined heavily against the Dollar in October, while the single currency has also endured a volatile period versus the Pound and the focus this week will fall on the ECB interest rate announcement and press conference.
The Chairman of the Central Bank, Jean-Claude Trichet, has all but confirmed that policy makers will also implement another 50 basis point reduction in borrowing costs in the latest move to boost the ailing economy.
In addition, the European Commission will also publish its semi-annual economic forecasts, which are likely to report a significant reduction in growth expectations, while the PMI index of Euro-zone services and manufacturing is expected to mirror the very weak tone of the preliminary data.
Aside from the U.S Presidential election, which will obviously take centre stage, it is a big week in terms of economic data with both manufacturing and service sector growth expected to slip further into negative territory, while Friday’s employment report may show that job losses have risen a further 185,000 in October.
Non Farm payrolls probably shrank for a 10th consecutive month with the unemployment rate jumping to the highest level for more than five years as the loss of almost one million jobs, falling property values and frozen credit weighs on consumer confidence.
U.K 09:30 CIPS Manufacturing PMI (October)
U.K 16:00 King & Darling Testify to Treasury Committee on the Banking Crisis
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