The Euro continues to make widespread gains against the majors and may rally towards $1.50 versus the Dollar according to the Fibonacci sequence
Following on from last week, the Pound declined heavily against the Euro, dropping 4.1% to yet another record low of 1.0470 and perilously close to parity amid another historic week for financial markets as the Federal Reserve cut U.S interest rates to a range between zero and 0.25% and investors speculated on the probability of the Bank of England following their example.
The UK currency also lost ground against the Dollar, slipping back under $1.5000 on Friday as UK unemployment rose in November at the fastest pace since 1991, while retail sales declined further and the minutes from the Bank of England's last policy meeting showed that policy makers even considered a bigger reduction in December.
The increase in the UK jobless rate to the highest level since 1991 has further hampered Sterling sentiment with the claimant count surpassing the 1 million mark for the first time since 2001 as companies’ struggle to overcome the existing financial crisis and slash their workforce.
The monetary policy committee also voted unanimously to cut the borrowing costs to 2.0%, the lowest level since 1951, as the worsening economic climate caused a decline in tax revenue, while the UK budget deficit widened to a record level in November.
In addition, the Pound also cane under pressure as UK mortgage approvals fell 51% year-on-year last month and the language used in the minutes prompted speculation of another aggressive easing in rates next month as policy makers consider lowering borrowing costs to the lowest level in the Bank of England's history.
The abysmal tone of recent UK economic data has illustrated the problems facing the beleaguered UK economy as the government attempts to spur lending and stimulate the economy that has been battered by the global credit crisis and thrust into the worst recession since the 1970s.
The BoE governor Mervyn King and the UK Chancellor Alistair Darling have both expressed the need to revive confidence in the banking system and spur consumer spending but a collaboration of rate cuts and increased liquidity has failed to stimulate growth and the Bank of England may have to resort to a period of quantitative easing to boost growth.
However, a report from the Office of National Statistics on Friday showed that UK retail sales unexpectedly increased in the three months through November as higher food demand for the Christmas period offset declines elsewhere with sales increasing 0.3% on the month after previously falling by the same amount in October.
In addition, a separate report showed that UK consumer confidence improved in December as the cost of petrol prices retreated and the government cut value added tax to 15.0% in an effort to revive the economy by encouraging people to step up spending despite the risk of mass unemployment.
An index of sentiment unexpectedly rose in December as lower energy costs and discounted goods helped bolster sales even as the economy hurtled towards a recession and the cut in tax has helped boost large purchases.
The positive momentum surrounding the Euro saw the single currency rally to a record high against Sterling for nine days consecutively this month and also make strong gains versus the Dollar amid suggestions that the European Central Bank are nearing the end of their easing cycle and are not prepared to drop interest rates under 2.0%.
Nevertheless, ECB governing council member Miguel Angel Fernandez Ordonez said that the Central Bank may cut interest rates in January if inflation expectations were significantly less than 2.0% and his comments over the weekend contrast with the recent rhetoric from the chairman Jean-Claude Trichet who said there is a limit to how far policy makers can cut rates.
From a technical perspective, the Euro may rise to $1.5000 against the Dollar over the next month, extending its 10% advance well beyond the current levels according to a series of numbers known as the Fibonacci sequence.
The Dollar has weakened to the lowest level against the Euro since late September as the Fed opted to cut interest rates to near zero per cent in an unprecedented action to stimulate the economy and the U.S currency subsequently fell for the fourth consecutive week against the Euro as reduction reduced the allure of U.S assets as a haven.
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Today:
The last trading day for spot trades before Christmas
Further bad news on the Euro but US Dollar weakness
TorFX would like to wish all our listeners and readers a very Merry Christmas and a happy and prosperous New Year.
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The Pound plunged to a record low against the Euro yesterday as unemployment rockets to the highest level since 1991
The Pound plunged to yet another record low against the Euro yesterday, dropping to a low of 1.0703 versus the Euro, while also registering sharp losses versus a basket of currencies following reports that UK jobless claims rose in November at the fastest pace since 1991 and the BoE minutes increased speculation that interest rates will be cut to zero per cent over the coming months.
According to a report from the Office of National Statistics, the number of people out of work and claiming benefits rose 75,700 from October to 1.07 million, the highest level since July 2000, and unemployment will continue to rise sharply over the coming months as UK companies slash jobs amid the worst financial crisis in almost a century sends shockwaves through the market.
Manufacturing and service sector growth has contracted at the fastest pace in decades and companies affected by the worldwide economic slump and almost 30,000 jobs are under threat from the collapse of Woolworths Plc and MFI Retail Ltd after both retailers went into administration last month and has struggled to find buyers.
The Prime Minister Gordon Brown responded to the unemployment data by telling reporters that the government is prepared to do whatever is necessary in order to improve the labour market as business service companies are expected to cut a further 275,000 jobs over the next two years as the deepening and prolonged recession ravages the advertising and real estate industries.
The UK claimant count rose for a tenth consecutive month in November, the longest stretch of losses since the 16 months through June 2006, and the meteoric rise in claims was revised to 51,800 in October from 36,300 and the jobless rate was last above the 1 million mark in January 2001.
The UK economic boom over the past 16-years has well and truly ended as the economy contracts 0.5% in the revised figures for the third quarter and recent estimates from the Bank of England indicate that growth will shrink 1.3% in 2009 despite severe monetary easing and the government's efforts to revive lending.
Gordon Brown's handling of the credit crisis has drawn support and seen his party recover in the polls but the Labour party face the prospect of fighting the next election with unemployment approaching 3 million, a level last seen under John Major's tenure as Prime Minister in the early 1990s, and that may encourage Brown to hold a general election before the deadline of June 2010.
The Pound also declined against the Dollar after rising to a high of $1.5618 the previous day following the Federal Reserve's unprecedented decision to cut U.S interest rates to between zero and 0.25% but the focus yesterday fell squarely on the release of the minutes from the Bank of England's last policy setting meeting.
Policy makers lowered interest rates to just 2.0% in December, the lowest level since 1951, and the report yesterday showed that the nine-strong monetary policy committee voted unanimously to cut rates this month, while the accompanying statement indicated that a more aggressive action was considered, which would have brought borrowing costs to the lowest level since the Bank's foundation in 1694.
The chairman of the Bank of England, Mervyn King, said that a larger cut "might be justified by the scale of the downside risks to inflation" and the Pound subsequently declined to yet another record low versus the Euro amid speculation that UK interest rates will be cut to 1.0% in the first quarter of next year.
The monumental decline in Sterling sentiment shows few signs of abating as investors speculate on the possibility of parity with the Euro but the minutes yesterday also highlighted that the depreciation of the Pound "should act to support next export growth" and policy makers are actively talking down the UK currency with the hope that a weaker Pound will attract overseas demand in UK exports.
However, manufacturing only accounts for roughly 14% of UK gross domestic product and the worsening economic climate means that companies are scaling back their workforce and factory production, while the worldwide slump is unlikely to boost demand from abroad in the near-term.
The Pound fell as much as 3.5% against the Euro yesterday and the UK currency looks 'oversold' to a degree, the pace of the decline is showing very few signs of subsiding as investors look at the aggressive actions of the U.S Federal Reserve early this week and believe the Bank of England will follow.
The Pound also came under renewed selling pressure versus the Dollar, dropping 0.9% on the session, as the abysmal tone of UK fundamentals and the increasing prospect of another large cut in borrowing costs continues to weigh on sentiment and will probably push the Pound even lower before the turn of the year.
A former member of the MPC, Charles Goodhart, said yesterday that Mervyn King should exercise "aggressive" policies to combat the economic slump and also urged the governor to approach next year with "courage and flexibility" to do whatever is necessary in bringing the economy of the worst recession since the 1970s.
It could be argued that the recent trend means that the Pound is more at risk among the major currencies as the ongoing financial crisis forces central banks globally to follow the Fed's dramatic example but the European Central Bank have publicly expressed unwillingness to drop the benchmark rate lower than 2.0% as the monetary easing cycle draws to a premature end.
The Euro is rallying strongly against the Dollar and the incredible appreciation versus the Pound is showing few signs of peaking as Europe's inflation rate fell the most in almost twenty years last month as oil prices continued to plummet and provided the ECB with further scope to cut interest rates beyond the current 2.5%.
The President of the Central Bank, Jean-Claude Trichet, said yesterday that there is a limit to how far the ECB are prepared to cut interest rates even as the recession takes hold and inflationary pressures moderate from 3.2% in October to just 2.1% last month, the biggest monthly drop since records began in 1991.
The sustained drop in commodity prices and a deteriorating economic climate raised concerns about the emergence of deflation but the ECB has seemingly discounted that threat, saying that a slowing of price increases is more likely rather than a period of declines.
The Dollar traded close to the lowest level in 13-years versus the Yen yesterday, while the U.S currency also slumped to the weakest versus the Euro since September as the Fed's decision to cut interest rates to between zero and 0.25% reduces the appeal of holding U.S assets.
The greenback also plunged against a basket of currencies and surprisingly failed to take advantage of broad Sterling weakness as long-term treasury yields fell and U.S stocks declined amid speculation that the Fed is running out room to cut interest rates and may have to begin a period of quantitative easing as a last resort to stimulate the economy.
The Pound fell to a record low against the Euro but took advantage of broad Dollar weakness, rising above $1.5600 last night
The Pound resumed its downward momentum against the Euro yesterday, dropping to a fresh record low at 1.1056, while the UK currency took advantage of broad Dollar weakness and rallied to a high of 1.5608 last night after an unprecedented announcement from the U.S Federal Reserve.
The FOMC slashed the main U.S interest rate to a range between zero and 0.25% and said it will do whatever is necessary to bring the economy out of its current slump, warding off fears of a Depression, and reviving credit in an effort to boost stability and spur lending.
In the accompanying statement, policy makers said that they will “employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability” and the Dollar subsequently declined as the cut was greater than anticipated.
The tone of the statement was almost designed specifically to increase an element of risk aversion in the market that encouraged investors to sell safe haven assets in favour of high-yielding currencies and the Dollar has endured the biggest two-day decline against the Euro on record.
Treasuries also rallied as the FOMC added that “the focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations”. The market rallied in anticipation that the Fed will continue to buy mortgage-backed securities in an attempt to force borrowing costs for consumers lower.
Policy makers have now lowered U.S interest rates on nine occasions in little over a year but together with the injection of $1.4 trillion in emergency lending, have so far failed to slow the economic downturn that is leading to the worst recession in a quarter of century and record low borrowings costs.
The key points of the Fed’s statement last night were designed to improve stability in financial markets and weaken the Dollar to boost export demand but the committee also noted that it will purchase agency debt and is ready to expand the program in considering the potential benefits of buying long-term Treasury securities.
The historic decision from the Federal Reserve could lead to a period of quantitative easing as policy makers send an extraordinary message that it is prepared to pump money into the financial sector until the economic downturn is reversed.
In the aftermath of the announcement, the U.S Treasury Secretary Henry Paulson addressed the delay over the projected $14 billion stimulus package to save struggling automakers General Motors Corp and Chrysler LLC and he said that officials were working on the terms of the bailout.
The renewed optimism sweeping through financial markets has curtailed the Dollar’s upside momentum against the majors and the magnitude of the decline last night took the U.S currency above $1.5600 versus the Pound and 1.4147 against the Euro.
The Pound slumped to yet another record low against the Euro and after a brief period of consolidation, the downside move is gathering in momentum and found fresh impetus yesterday after a government report showed that UK inflation fell in November to the lowest level since June.
Falling oil prices and a worsening economic climate has tightened its grip on the economy as consumer prices rose 4.1% from this stage in 2007, compared with 4.5% in October and the result means that the BoE governor Mervyn King had to publish another letter of explanation to the Treasury, explaining why the rate still exceeds the 3% upper limit.
In a letter to the Chancellor of the Exchequer Alistair Darling, King said that Britain’s inflation rate may fall next year to the lowest level since 2002, indicating that policy makers will continue cutting interest rates in the first quarter in attempt to stimulate the economy.
The UK inflation rate may fall below 1% in 2009 and King also emphasised that consumer prices may undershoot the government’s 2.0% target as policy makers will have to deal with a new threat of deflation.
The Pound subsequently declined against the Euro amid increased speculation that the Bank of England will need to cut interest rates from the current 2.0% in January, already at the lowest level since 1951, and Mervyn King has refused to rule out the possibility of deflation next year or cutting borrowing costs to zero per cent.
The Pound has declined over 20% in value against the Euro this year and almost 25% versus the Dollar, which has helped ease price pressures in the UK, while commodities have also tumbled with oil prices plunging 60% since reaching a record level in July.
The annual pace of inflation peaked at 5.2% in September and has exceeded the government’s 2.0% target for 14-months but falling petrol prices have helped, while shops bring forward sales to lure consumers that are concerned that they may lose their jobs.
The UK economy has fallen into a recession in the third quarter as tighter lending conditions rationed credit, while house prices plunged at the fastest pace since 1978 as the government’s attempts to stimulate spending with a £50 billion rescue package has so far failed to revive credit.
The Pound rebounds against the majors after falling to another record low versus the Euro for the sixth day in succession
The Pound slumped to yet another record low against the Euro yesterday before bouncing back towards the end of the session as the UK currency snapped five days of declines versus its European counterpart as investors judged that the losses over the past week were excessive.
The Pound tumbled in early trade as the Conservative leader David Cameron said that he opposed a government intervention to improve the UK currency and said that “the fall in sterling against other currencies is the market saying your recession is going to be deeper and your debt that you have to raise in the markets is going to be higher”.
Cameron was a political adviser to the then Chancellor of the Exchequer Norman Lamont who presided over the Pound’s exit from the European Exchange Rate Mechanism in 1992 in an event that become known as “Black Wednesday”.
The somewhat surprising bounce in Sterling came after its 14-day relative strength index, a technical chart used by traders to predict currency movement, fell to a reading of 27.7 and a level below 30 indicates that a revival may be imminent.
The Pound also rallied after reaching a level that would have been equivalent to a record low versus the Deutsche Mark and it could be argued that the downside momentum had reached a significant support level and had to consolidate following an aggressive move over the past week. The short-term revival in Sterling sentiment also saw the UK currency rally significantly against the Dollar, despite reports that house prices declined further in December and may drop an additional 10% in 2009 as the economy struggles to cope with the worst recession since the 1970s.
The average asking price for a home fell 2.3% from the previous data in November to an average £217,808, according to a report from Rightmove Plc, and the accompanying statement also indicated that rising unemployment will extend the slump in the UK property market over the next year.
The restricted lending conditions due to the financial crisis means that mortgage approvals have fallen to near record lows in recent months, threatening to exacerbate the economic downturn and help push home sales to the lowest level since records began in 1978.
Elsewhere, Barclays Plc CEO John Varley predicted that UK home values may decline by as much as 15% in 2009 as the recession ravages the advertising and real estate industries but the aggressive cut in borrowing costs in accordance with a government rescue package for UK banks is expected to improve sentiment.
The UK Treasury announced yesterday that it will cut the fee it will charge banks to underwrite £250 billion in guarantees in the another measure to help unfreeze credit markets and help stimulate the economy.
Bank’s are beginning to pass on the recent aggressive cut in UK interest rates after the BoE slashed borrowing costs to the lowest level since 1951 in December, while the recapitalisation of UK banks will inevitably free up credit.
In addition, reports this week are expected to confirm that the claimant count breached the 1 million mark for the first time since 2001 and a separate report yesterday from the Centre for Economic and Business Research said that UK business services companies will slash 270,000 jobs over the next two years.
UK stocks teetered between gains and losses yesterday amid reports that HSBC Holdings Plc fell as Europe’s largest bank confirmed that it has about $1 billion at stake in the collapsed Bernard Madoff venture, who allegedly lured some of the world’s biggest institutions into investments where gains were paid using money from new investors.
The Euro pulled back earlier losses to stand relatively unchanged against the Pound last night, while the single currency also rallied to a two month high versus the struggling Dollar amid speculation that the FOMC will cut U.S interest rates to 0.50% this evening.
The U.S currency is also approaching a 13-year low versus the Yen and declined to $1.5378 at one point versus the Pound as a report from the Federal Reserve showed that manufacturing in the New York state collapsed and contracted in December at the fastest pace on record.
The tone of the report will only reinforce support for another reduction in U.S interest rates, while the government dithers over the terms of a possible rescue package for struggling U.S automakers and the Dollar may come under renewed selling pressure as we build up to the announcement this evening.
The Dollar has declined for a second consecutive day against the Pound as the decline was exacerbated by reports from the U.S Treasury that international demand for long-term U.S financial assets weakened in October as overseas investors sold U.S stocks and corporate bonds.
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Today:
Luke Trevail returns but with more bad news for Euro buyers
Appetite for higher yield currencies sees the Pound strengthen against the US Dollar
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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 slumps to a record low for five consecutive days against the Euro as the weakness in UK fundamentals exacerbates the economic downturn
The Pound slumped to a record low against the Euro for five consecutive days last week, dropping under 1.1200 on Friday, after HBOS Plc said that bad loans will keep rising as credit conditions deteriorate, signalling that the Bank of England may need to continue to the pace of monetary easing in January.
The UK currency has come under serious pressure against the majority of the 16 most actively traded currencies as a host of weakening UK fundamentals indicate that the economic slump is intensifying and the government is fighting the worst recession since the 1970s.
Nevertheless, the Pound did rally to a high of $1.5117 against the Dollar as an element of risk appetite crept back into the market following suggestions that the U.S government were poised to rescue struggling automakers with a $14 billion stimulus package.
However, the Senate rejected the proposal on Thursday evening and the Pound subsequently weakened against the Dollar as global stocks tumbled and demand for riskier assets evaporated amid speculation that General Motors Corp and Chrysler LLC will be forced into Chapter 11 bankruptcy if an agreement isn’t reached.
The correlation between falling stock markets and a declining Pound has been increasingly prevalent in recent weeks but the news from HBOS Plc on Friday undermined Sterling sentiment amid speculation that UK interest rates could be cut to zero per cent.
The FTSE 100 Index lost 2.6% on Friday and the Pound depreciated 1.3% to the lowest level since the Euro’s introduction in 1999 as policy makers try to limit the fallout from the global credit crisis but interest rates can only be cut so far before the government has to look at less conventional techniques to revive the economy.
The accompanying statement from HBOS Plc, which agreed to a takeover by Lloyds TSB Group Plc, said that this year’s charge for bad loans rose to £5 billion as the credit crisis deepened and investors are still looking for further downside movement for the Pound against the Euro as we approach year-end.
In terms of economic data, the focus this week will fall on the tone of the minutes from the Bank of England’s last policy meeting where the MPC elected to cut interest rates to just 2.0% in an effort to improve lending conditions.
The nine-strong monetary policy, including the governor Mervyn King, are expected to have voted unanimously for the cut but investors will also be monitoring the tone of the statement for insights into how aggressive the BoE is prepared to be in terms of policy adjustment.
A number of committee members, including Andrew Sentence last week, have refused to rule out the possibility of cutting borrowing costs to zero per cent and the minutes could potentially exacerbate the Pound’s decline as the UK currency continues edging closer towards 1.1000 versus the Euro.
Elsewhere, the UK consumer price index for November will probably confirm another sharp deceleration in the annual inflation rate to 3.9% from 4.5% the previous month amid falling commodity prices that has seen oil lose over two thirds in value since the July high of $147.27 a barrel .
In addition, the dismal pattern of weak economic data will also weigh on the Pound as a government report will probably show a further drop in retail sales over the past month, while November unemployment is expected to push the claimant count above the 1 million mark for the first since early 2001.
The Euro has been gathering in momentum over the past week as the diverging interest rate expectations between the ECB and the Bank of England makes the single currency an increasingly more attractive commodity to investors.
A number of ECB governing council members have publicly expressed concerns on dropping interest rates below 2.0% after another aggressive 50 basis points reduction early this month to 2.5%.
Recent reports have indicated that the recession in the Euro-zone is deepening as a number of key industries slip further into contraction but policy maker Axel Weber said on Thursday that he would prefer to avoid taking the base rate below 2.0%.
However, at the same time Portugal’s finance minister Vitor Constancio said that the ECB still have a “margin of manoeuvre” to fight the risk of deflation and the council appears split on whether to resume monetary easing into the New Year.
While investors speculate on the prospect of another 1% percentage point cut by the Bank of England in January, the Pound is likely to decline further against the Euro amid speculation that the ECB is nearing the bottom of its easing cycle.
The Dollar bounced back against the majors on Friday and a 13-year low versus the Japanese Yen amid speculation that the Bush administration will utilise funds that were previously intended for financial institutions to bailout GM Corp and Chrysler LLC.
General Motors moved a step closer to a possible government rescue on Friday as the government said it may tap into the bank bailout fund after the Senate rejected a $14 billion stimulus package to ward off bankruptcy.
GM Chief Executive Officer Rick Wagoner has apparently been in discussions with senior White House officials, including the Treasury Secretary Henry Paulson, regarding a short-term plan to keep the struggling automaker solvent.
While Congress dithers over the terms of the projected bailout that was rejected by a majority on Thursday, the looming threat of a bankruptcy at the automakers may send the U.S economy into chaos within weeks, if it led to a shutdown at the companies.
Economists warned on Friday that automakers would close plants, lay off tens of thousands of workers and dramatically cut production that would cause many of their suppliers to collapse and trigger more job losses on a worldwide scale.
The Dollar remains very sensitive to the reports around the struggling U.S automakers and that trend will probably continue this week, while the focus switches to Tuesday’s FOMC rate announcement and the Federal Reserve are expected to cut interest rates to 0.50% as policy makers run out of room for further reductions.
The new shorter, more frequent, Foreign Exchange Outlook Podcast, brought to you by TorFX.
Today:
Another All Time Low Against the Euro
The US Dollar goes above 1.50... albeit briefly
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.
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 crashed to yet another record low against the Euro after UK consumer price expectations fell by the most since records began in 1999
The declining sentiment surrounding the UK economy sent the Pound crashing to yet another record low against the Euro on Thursday as the UK currency plunged to 1.1230 on the session after an index of manufacturers’ output expectations matched the lowest level in almost 30-years.
The Pound has now fallen to the lowest level against the Euro on four separate occasions this week amid a barrage of weakening economic fundamentals that have strengthened the case for a further reduction in UK interest rates, while the Bank of England and the Treasury calculate the benefits of less conventional techniques to boost growth.
The report from the Confederation of British industry showed that factory orders for the next quarter remained at a reading of minus 43, the lowest level since 1980, as the UK economy slips further into its first recession in 17-years and the Pound lost a further 1.2% in value against the strengthening Euro.
Elsewhere, a separate report from the Bank of England showed that UK consumer price expectations for the next year fell by the most since records began in 1999 as the recession intensified and oil prices lost over a third in value since July.
The median forecast on increases in consumer price inflation fell to 2.8%, compared with just 4.4% in August, and the Bank of England must now avert the risk of deflation as the economy sinks into possibly the worst recession since the 1970s, according to BoE policy maker Andrew Sentence.
The significant drop in consumer price expectations will provide further scope for the Bank of England to reduce interest rates beyond the current 2.0% and the Pound is struggling amid speculation that policy makers will enact another sharp cut in January, to possibly to the lowest level in the Central Bank’s history.
The main objective for the government and BoE policy makers is to encourage banks to loosen credit conditions and revive consumer spending that would help boost services and stimulate the economy.
Woolworths Group Plc started a closing down sale yesterday as the owner of 815 UK stores failed to attract a rescue bid that would save more than 25,000 jobs in what will represent the largest collapse of a UK retail chain on record.
The intense speculation surrounding the prospect of zero per cent interest rates in the UK will continue to undermine Sterling sentiment over the coming months and only some evidence of a recovery in UK fundamentals will prevent the Pound from plummeting further against the Euro.
Nevertheless, UK stocks rallied yesterday as the FTSE 100 Index climbed to a one-month high on the session, led by energy companies, as crude oil prices surged 10% higher after the Saudi Arabian oil minister said he had delivered the massive output cuts promised to OPEC, a sign that supplies are smaller than initially anticipated.
The Euro is gathering in momentum against the majors as the single currency continued to rally higher versus the Dollar despite speculation that the German economy will contract 2.2% in 2009 after a report from the Munich based Ifo institute predicted the worst recession since the end of the Second World War.
The economic slump will continue into 2010 as declining tax revenue and bigger government spending on unemployment benefits will push Germany's budget deficit to 1.4% of gross domestic product in 2009 and 2.9% the following year.
This latest forecast from the Ifo adds to recent evidence that the German economy is facing its deepest economic slump since returning to democracy in 1949 and that will increase pressure on Chancellor Angela Merkel to play a more active role in stimulating growth and encourage the ECB to continue the pace of monetary easing.
However, the Euro has found support this week as policy makers shy away from committing to another rate reduction in January as governing council member Axel Weber warned against reducing borrowing costs below 2.0%, suggesting that the Central Bank may be close to the end of its rate-cutting cycle.
Just a week after slashing interest rates by 75 basis points to the lowest level in its history, the ECB have expressed little appetite in following the Federal Reserve and Bank of England in continuing an aggressive easing in monetary policy and that may propel the Euro higher over the coming weeks.
The Dollar has been under increasing pressure against majors this week and the U.S currency may extend its decline in the near-term after the cost of borrowing dollars tumbled and indicated weakening demand for year-end funding.
The Dollar fell to the lowest level in seven weeks against the resurgent Euro yesterday as a separate government report showed that the U.S trade deficit unexpectedly widened in the latest figures for October after exports slid to a seven month low, while the number of Americans filing for unemployment claims surged to the highest level since 1982.
The aggressive swings in risk sentiment is also driving the Dollar lower as discussions on a U.S automaker bailout reaches the Senate and politicians negotiate a tentative compromise on a $14 billion rescue package that will probably be rejected and that may revive Dollar sentiment as an element of risk aversion creeps into the market.
The Pound falls to another record low against the Euro amid reports that the UK economy will contract at the fastest pace in 18-years this quarter
The Pound slumped to yet another record low against the Euro yesterday, falling to 1.1338 on the session following another round of worsening economic data that showed the UK economy may contract at the fastest pace in 18-years during the fourth quarter.
The report from the National Institute for Economic and Social Research illustrated the problems facing the Bank of England as UK gross domestic product fell 1% in the three months through November and will probably plunge further over the coming months, according to the accompanying statement.
The NEISR said that the data confirms that the rate of output in the UK is deteriorating and the statement also emphasised recent comments from the Chancellor of the Exchequer Alistair Darling in that the main objective is to loosen the availability of bank credit and spur lending.
Nevertheless, the statement also highlighted that “further interest rate reductions are unlikely to have much effect” despite policy makers lowering the bench mark lending rate to 2.0% this month and the government may have to utilise less conventional techniques of stimulating the economy.
BoE policy maker Andrew sentence added to the gloomy outlook for UK economic growth yesterday as he told reporters that the recession will probably be as deep and prolonged as any since the 1970s despite the government’s plans to cut taxes and pledge £50 billion in a bank rescue that has thus far failed to stop the decline.
UK interest rates are currently at the lowest level since 1951 but some major banks have refused to pass on the full extent of the cuts as an element of panic still stalks the banking system, which is still reeling from the worst financial crisis since the Great Depression.
Lenders have passed on less than half of the 150 basis points cut in November and the Bank of England followed up with another one percentage point reduction this month but it is unlikely to revive the ailing UK property market as prices slip to the lowest level since 1978.
The UK currency also fell to its weakest level on record against the currencies of its major trading partners and from a technical perspective the trend appears to be down as the Pound slumps to record lows versus Euro on an almost daily basis.
The recent pattern between stock market movement and currencies has been increasingly prevalent in recent weeks but a two-day rally in global stocks has failed to boost sentiment as the Pound is now considered a weaker asset that the strengthening Euro.
The Bank of England and the government will together recognise the benefits of a weaker Pound in bolstering the economy but officials are risking a run on the UK currency as slowing global demand and shrinking factory production means that exports are unlikely to stimulate growth.
However, the Pound bucked the trend of declines by rising to a high of 1.4880 versus the U.S Dollar amid an increase in risk appetite following reports that the UK government is considering pumping billions of Pounds into the economy in an unprecedented move to halt the recession.
The Bank of England and the Treasury are discussing the possibility of a strategy known as ‘quantitative easing’ where officials increase money supply into the economy to bolster bank reserves and therefore unlock lending restrictions in a final attempt to bring the economy out of the current slump.
The positive momentum surrounding the Euro shows few signs of slowing as the single currency also breached above $1.3000 versus the Dollar after ECB Executive Board member Juergen Stark admitted that any further rate cuts would be “small” as the Central Bank runs out of room for further easing.
ECB policy makers elected to respond the financial crisis and lower the benchmark lending rate to 2.5% last week and to the lowest level in its history as the U.S led global recession spreads to Europe.
Stark’s comments seem to indicate that the Central Bank will adopt a wait and see policy over the next month and look to re-assess the outlook for price stability before any decision is taken on a further reduction in January.
Investors were lured away from safe haven currencies like the Dollar and the Yen amid separate reports that U.S lawmakers are prepared to take a vote on a $15 billion automotive bailout that could face strong resistance within the Senate.
General Motors Corp, Chrysler LLC and Ford Motor Co are struggling to ward of bankruptcy as shares in the automakers slumped again in New York yesterday but the Republicans plans to appoint a so called ‘car czar’ may result in a similar fate unless the companies can come up with a restructuring plan by March 31st.
The Dollar may continue to struggle against the majors today as the U.S government increases its budget deficit by spending an unprecedented amount of money in yet another attempt to bolster the economy and Dollar buyers would be well placed to monitor the current trend or consider a stop order to protect against further weakness.
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The 1% Bank of England Rate Cut
A New Low Against the Euro
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The Pound falls to yet another record low against the Euro after industry reports confirm further contraction in housing and factory output
The Pound slumped to a fresh record low against the Euro yesterday, while the UK currency also fell to a low of $1.4681 versus the Dollar following industry reports that showed UK house prices had slipped to the lowest level since at least 1978.
Recent UK fundamentals have illustrated that the economy is slipping deeper into a recession as factory production fell 1.4% from the previous month and a report from the Royal Institution of Chartered surveyors showed that property agents sold the fewest number of properties since records began over 30-years ago.
The Pound declined for second consecutive day against the Euro as separate reports showed that UK retail sales record the first back-to-back decline since records began in 1955 as tighter lending conditions and falling home values curtailed the pace of consumer spending.
There is mounting pressure on the Bank of England to continue the pace of monetary easing and yesterday’s reports will only intensify that pressure as policy makers attempt to steer the economy away from an extended economic slump after manufacturing contracted by almost three times initial estimates in October.
The Monetary Policy Committee slashed interest rates to 2.0% last week and to the lowest level since 1951 but policy makers may be forced into action again in January amid predictions that growth in the UK economy will contract further in 2009.
The Pound subsequently declined yesterday as falling house prices and a slump in overseas demand for UK exports threatens to push the economy further into a recession as manufacturing output contracted for an eighth straight month to record the longest streak since the 1980 recession, during Margaret Thatcher's tenure as Prime Minister.
The decline in production was the biggest monthly fall since 2005 and although manufacturing accounts for just 14% of UK gross domestic product, compared with about 75% for services industries, the magnitude of the decline suggests that the dramatic fall in oil prices is doing little to revive sentiment.
The slump in the housing sector is also worsening as prices have dropped 7.4% from this stage in 2007, while tighter lending restrictions means that mortgage approvals have fallen an incredible 52% from last year as banks granted just 39,900 loans for home purchases.
The government's primary objective is to make sure banks and lenders pass on the full extent of the recent easing in borrowing costs and in the main, most major banks did cut their standard variable rates after last week's decision as policy makers attempt to revive lending and spur consumer spending.
However, the Bank of England can only cut interest rates so and will need to consider less conventional techniques to stimulate the economy as the Chancellor Alistair Darling said yesterday that the government will consider whether to extend credit guarantees to households and companies as way to spur bank lending.
Darling is also considering whether to expand a £250 billion treasury program to support loans between banks and the measures would mark an unprecedented step by the government to underwrite commercial loans following the rescue package to take controlling interests in HBOS Plc, Lloyds TSB Group Plc and the Royal Bank of Scotland Plc.
The Euro is gathering in momentum as the single currency rallies to a record high against the Pound and also makes widespread gains versus a basket of currencies after German investor confidence unexpectedly rose for a second month in December as sentiment improved following an aggressive cut in borrowing costs.
The ZEW centre for European Economic Research said its index of investor and analyst expectations increased to a reading of minus 45.2, from minus 53.5 in November and the report goes against recent trend of data showing that Germany's economy is in the midst of a recession. Last week, German lawmakers passed the government's €32 billion stimulus plan, a day after the ECB cut interest rates to 2.5%, and the measures, combined with a weaker Euro and falling commodity prices have helped improve optimism that the economy will recover quicker than initially anticipated.
The Euro is stood firm yesterday after separate reports showed that exports in Germany and France, which account for around 50% of gross domestic product, fell in October as slowing global growth curbed demand.
The impact of Barack Obama's pledge to invest in the nation's infrastructure increased an element of risk appetite on Monday but the Dollar bounced back against the Pound yesterday despite reports that pending sales of existing homes fell again in October as a seizure in global credit markets extends the housing slump into a fourth a year.
The Pound rallied against the Dollar yesterday after remarks from the President-elect Barack Obama rekindled an appetite for risk
The Pound rose by the most against the Dollar in almost a month yesterday but the UK currency failed to hang on to similar gains versus the Euro despite a worldwide rally in stocks that eroded the appetite for the U.S currency as a safe haven asset.
The UK currency also made widespread gains against a basket of currencies, including the Australian and New Zealand Dollars, as equities in Europe and Asia rallied higher following a statement from the U.S President-elect Barack Obama who pledged the largest infrastructure-spending package since the 1950s.
At a news conference in Chicago, Obama told reporters that the biggest investment in the nation’s infrastructure since President Eisenhower created the interstate highway system was key in reviving the struggling economy as growth slips further into contraction.
Although he declined to specify an amount for the stimulus package, Obama did say that it would be “substantial” and his remarks sparked a global stock market rally, while commodities also rose higher with crude oil prices up $6 by the opening in New York.
Obama’s plans to invest in infrastructure was also the catalyst for gains in shares of construction and engineering companies that may benefit from the increased public spending and demand products.
The Pound subsequently appreciated 2.5% in value against the Dollar, touching a high of $1.5047 before selling off towards the close of the European session but the Dollar may continue to suffer in the term as an element of stability returns to the market and a renewed appetite for risk.
However, it is trend that is unlikely to last beyond the short-term and Dollar buyers would be well placed to take advantage of a rate close to $1.5000 or at least consider the use of a stop order in the market to protect against move back down towards the support at $1.4470.
The Pound also stood firm following reports that UK factories cut prices for the fourth consecutive month in November as petroleum products fell by the most in over 20-years and the worsening economic climate defused inflationary pressures.
Producer prices fell 0.7% following a 1% drop in October and the report from the Office of National Statistics illustrates that the monumental drop in oil prices is slowly feeding through to the broader economy and providing yet more scope for the Bank of England to keep reducing interest rates.
Policy makers have slashed UK borrowing costs to 2%, the lowest level since 1951, as the Central Bank attempts to limit the impact of a recession, while preventing deflationary pressures from taking hold.
In terms of economic data, the focus this morning will fall on the BRC retail sales survey, which is expected to confirm a further drop in consumer spending for December, while manufacturing production is also expected to slip into negative territory and that could potentially put the Pound under renewed selling pressure.
The volatility sweeping through the currency market shows few signs of abating as the Euro rallied to a high of 1.1449 against the Pound yesterday, despite opening at 1.1651 earlier in the session, as industrial production in Germany fell more than initial forecasts in October.
Output declined to a seasonally adjusted 2.1% from September as companies rein in production and shed jobs as the global financial crisis that originated in the U.S pushed the German economy into a recession.
Elsewhere, the Euro found some support after ECB governing council member Ewald Nowotny said that the Central Bank is waiting to assess the impact of previous rate cuts before deciding whether to reduce borrowing costs further in January.
Investors are already speculating on the prospect of another 50 basis point cut next month but policy makers won’t want to pressurised by expectations and Nowotny’s comments yesterday showed that the ECB may not necessarily cut rates as early as January.
The Pound may extend its losses against the majors after the UK currency sank to a fresh record low versus the Euro
Following on from last week, the Pound plummeted to a fresh record low against the Euro, while the UK currency briefly sank under $1.4500 versus the Dollar as 10-year government bonds rose by the most in a decade following the Bank of England’s decision to cut interest rates to the lowest level since 1951.
The monetary policy committee, led by the governor Mervyn King, took the decision to slash UK interest rates by 100 basis points to 2% as the global financial crisis sent the banking system into meltdown and pushed the UK economy into a recession.
The government and the Bank of England are doing “whatever is necessary” in limiting the impact of the economic slump and together with the cut in value added tax, the aggressive reduction in borrowing costs is designed to spur consumer spending and improve lending conditions.
In the aftermath of the decision, the Prime Minister Gordon Brown stepped up pressure on British banks to pass on the full extent of the reduction in borrowing costs as three lenders resisted mounting demands to cut variable rates.
The dramatic cut in UK interest rates is relatively pointless in reviving sentiment unless banks and lenders cut their lending rates in accordance with the Bank of England but Halifax, the Royal Bank of Scotland Plc and Nationwide Building Society only slashed their main mortgage rates by less than one point.
Lloyds TSB Group Plc and HSBC Holdings Plc both passed on the full cut and speaking on GMTV, Brown told banks that refusal to pass on the rates cuts was “not acceptable” and the Prime Minister also recognises that in order to kick-start the economy he must get banks to lend and stop rationing mortgages in the UK.
Lenders approved just 32,000 new mortgages in October, a third of the 104,000 monthly average last year but the government has pledged to buy controlling stakes in RBS, Lloyds TSB and HBOS in exchange for assurances to boost lending volumes and lower the cost of credit.
The Pound slipped under 1.1500 against the Euro for the first time on record in the build up to the announcement and the UK currency extended losses against all but one of the 16 most actively traded currencies amid suggestions that interest rates could be lowered to zero per cent. The extent of last week’s cut in rates was largely in line with initial forecasts but an element of risk aversion crept back into the market as the 1% reduction highlighted the persistent problems surrounding the outlook for the UK economy and led investors flocking back to ‘safe haven’ assets like the Dollar and Yen.
Over the course of last week, the Pound lost a further 4.6% in value and a number of politicians and policy makers have expressed concerns that although the decline in sterling was necessary to revive growth, the government is running the risk of a collapse in the UK currency.
Recent estimates from the Organisation for Economic Cooperation and Development showed that UK gross domestic product contracted 0.5% in the three months through September and may shrink by 1.1% in 2009, the most since the last recession in 1991.
UK services accounts for roughly 90% of the economy and the monumental drop in spending has been emphasised by the decline in the housing market as home values slumped 2.6% in November, to record the biggest drop since 1992, and 16.1 from this stage in 2007.
The negative sentiment surrounding the Pound is likely to continue over the coming week as risk aversion saturates the market, while in terms of economic data, the focus will fall on UK producer prices data this morning and the report should offer further evidence of easing inflationary pressures.
The Euro continued to make record gains against the Pound last week despite another 75 basis point cut in European interest rates but the ECB Chairman Jean-Claude Trichet is under pressure to outline a plan to revive the economy or risk cutting interest rates to zero per cent.
The Central Bank has implemented the most aggressive series of rate cuts in its history but policy makers have failed to spell out a specific plan should conventional methods fail to head off deflation.
It is a relatively quiet week in terms of economic data and the focus this week in the Euro-zone will inevitably fall on the German ZEW expectations index for December and the report is forecast to slip again after the previous month’s surprising increase.
The Dollar posted another weekly decline against the Euro and Japanese Yen and the move was exacerbated on Friday as U.S non-farm payrolls in the U.S shrank by 533,000 in November, the 11th month that companies have cut jobs and a damning assessment of the deteriorating labour market conditions.
The U.S economy may be headed towards its deepest and most prolonged recession since the Second World War as mounting job losses weigh on consumer confidence and spending as employers cut payrolls at the fastest pace in 34-years with unemployment rising to 6.7%.
The Pound slumped against the majors, dropping to a record low versus the Euro, after the BoE cut interest rates 1%
The Pound sank to a fresh record low against the Euro yesterday, recording a low of 1.1504 at the end of the session, while the UK currency also declined heavily to the weakest level since 2002 versus the Dollar after the Bank of England cut UK interest rates to the lowest since 1951.
An element of risk aversion crept back into the market yesterday, as the Pound also slumped against the Yen and Swiss Franc following the Bank’s decision to lower interest rates by 100 basis points to 2%, as the economy drifted into a recession in the third quarter amid the collapse in lending that has curtailed the pace of spending.
The decision was largely in line with analyst expectations and the reaction in Sterling reflected an air of disappointment in the market because although a 1% cut was fully priced into the market, a decline in UK fundamentals increased speculation of an even bigger reduction.
Central Banks around the globe are in the middle of an aggressive easing in monetary policy and the governor of the Bank of England Mervyn King even discussed the possibility of lowering the UK interest rate to zero per cent for the first time in November and insisted that the biggest challenge facing policy makers is renewing the flow of credit.
According to a recent estimate from the Organisation for Economic Cooperation and Development, the UK economy may contract by 1.1% in 2009, the most since the last recession in 1991, and policy makers may continue cutting interest rates over the coming months to the lowest level in at least 70-years.
The UK benchmark interest rate is currently at the lowest level in the Bank of England’s history and the last time that borrowing costs were 2% was when Winston Churchill’s victory in the general election made him Prime Minister for the second time.
However, the Central Bank can only cut interest rates so far in attempt to spur lending and revive growth in the economy but once rates reach zero per cent, policy makers will have to resort to other initiatives such as expanding money supply and using it to plug government deficits as the economy enters a period of deflation.
In the accompanying statement, the MPC said that “conditions in money markets remain extremely difficult and the committee noted that it was unlikely that a normal volume of lending will be restored without further measures."
That sentiment was illustrated by reports that Halifax, the UK’s largest mortgage lender, defied the Prime Minister’s demand to pass on the full extent of the rate cuts to consumers, saying that its profit margins are under pressure.
The lender said that it would cut its standard variable rate to 4.75% from 5%, despite the Bank’s decision to cut interest rates to 2%, but one of the stipulations in the government’s bailout of HBOS Plc was that higher lending volumes and lower borrowing costs are among the “strings attached” to the rescue package.
The government and the Bank of England are actively trying to soften the impact of the UK’s first recession since the early 90s and with UK mortgage approvals at their lowest level since 1999 and rising unemployment, pressure is mounting on Gordon Brown to force banks to increase lending.
The Pound’s performance against the majors was largely influenced by UK stocks as the FTSE 100 Index swung between gains and losses as the aggressive cut in UK interest rates showed that the economic slowdown is gathering momentum despite the government’s efforts to revive growth.
In terms of economic data, the dwindling sentiment for the economy was further enhanced after UK house prices fell by the most since 1992 in November as tighter lending conditions and a worsening economic climate discouraged potential homebuyers.
Home values plunged 2.6% from October according to the largest UK mortgage lender as prices fell 16.1% from a year earlier to an average of £163,605 and the findings increase pressure on the BoE to continue the pace of monetary easing into the New Year.
Yesterday’s cut in the benchmark UK lending rate was part of a global pattern as the BoE was joined by the Reserve Bank of New Zealand and perhaps more significantly the European Central Bank, who resisted calls for a more aggressive cut by reducing borrowing costs by 75 basis points.
Recent estimates show that the European economy has slipped into a recession in the third quarter and the ECB’s governing council members delivered the biggest cut in its 10-year history, while the Swedish and Danish central banks also lowered their key rates.
The Central Bank’s decision to accelerate the pace of rate cuts signals that policy makers may be prepared to gradually ease rates below 2.0% for the first time since 2005, while the collapse in oil prices may see inflation fall by the most in almost 20-years and provide yet further scope for interest rate cuts.
In the accompanying press conference, the chairman Jean-Claude Trichet said that the Euro-zone economy will contract next year for the first since 1993 but he declined to give clues on further moves, saying that the central bank shouldn’t get trapped by cutting rates too low.
Nevertheless, the ECB will have to implement new measures to bolster growth as reports yesterday indicated that the economic slump is worsening with European investment falling in the second quarter and consumer spending shrinking beyond initial forecasts.
Gross domestic product in the second quarter shrank 0.2% in the three months through September as investment fell 0.6% in the first back-to-back decline since 2002 and household spending dropped 0.2% from the previous 3 months.
The ECB's decision to gradually lower interest rates in a progressive period of monetary easing saw the Euro strengthen against the majors yesterday as the single currency bounced back from a two week low versus the Dollar amid speculation that U.S non-farm payrolls will increase and unemployment will rocket to the highest level since 1993.
The focus today will fall on the monthly U.S employment report and the jobless rate is set to increase to 6.7% and that may hamper Dollar sentiment amid speculation that the Federal Reserve will need to cut interest rates to zero per cent later this month.
However, according to a senior currency strategist at Bank of New York Mellon Corp, the Dollar will extend its gains against the majors through the first half of 2009 as investors take refuge in the U.S currency as a relative safe haven asset amid times of turmoil.
The Pound declines against the majors as UK services industries contract by the most on record
The dramatic level of volatility surrounding the Pound continued yesterday as the UK currency slumped against the majority of the majors, despite a pickup in global stocks, as UK service sector growth contracted at the fastest pace in at least 12-years and consumer confidence deteriorated.
The Pound plunged towards a fresh record low at 1.1631 versus the Euro, while the UK currency also traded under $1.4700 against the Dollar, dropping 1.7% on the session and extending its yearly loss to 26%, the most since records began in 1972.
An index based on a survey of UK service companies slumped to a reading of 40.1, the lowest level since records began in 1996, while a survey from the Nationwide Building Society showed that a gauge of consumer sentiment sank to the lowest level since at least 2004.
Earlier this week UK manufacturing and construction surveys also showed the fastest pace of contraction on record in November, signalling that the UK recession has deepened and raised the probability of an aggressive easing in interest rates this lunchtime.
The sharp contraction in UK economic growth is showing few signs of slowing and there is a very real risk that the Bank of England will cut interest rates to zero per cent over the coming months and policy makers will probably slash the benchmark lending rate by one percentage point this month, bringing interest rates to the lowest level since 1951.
The report yesterday from the Chartered Institute of Purchasing and Supply showed that an index of service industries, which make up roughly three quarters of the economy compared with about 20% for manufacturing and construction, actually declined by more than initial forecasts to suggest the slump is worsening.
As a result, Investec altered its forecast after the release of the services data to predict a 1% cut instead of only a 50 basis point reduction from the current 3%, and the Pound subsequently declined against all 16 of the most actively traded currencies.
The tone of yesterday’s reports were met with cynicism by the market and there are big expectations for today’s Bank of England rate announcement as investors will be disappointed if it’s anything less than 100 basis points and it will be compelling to see the Pound’s reaction to such a decision.
Elsewhere, the record drop in the Nationwide consumer confidence index coincided with reports that the Royal Bank of Scotland Plc scrapped its full year profit forecast as credit losses escalated and bad loans rose.
Shareholders have conceded control of the Bank to the UK government as part of plans to shore up the banking system and the Prime Minister’s main objective now is to do whatever is necessary to spur lending and boost spending.
In addition, Gordon Brown said that the UK government will guarantee interest payments worth up to £1 billion owed by homeowners, who are struggling to keep up with mortgages, in an effort to prevent home repossessions and mounting mortgage defaults.
The UK treasury will guarantee payments to banks and allow homeowners who normally would have been refused a ‘payment holiday’ to a defer a proportion of their payments by up to two years and according to the Prime Minister, eight of the largest UK mortgage lenders have signed up to the plan.
The measure is the latest government initiative to cushion the economy from the recession following the largest fiscal stimulus package announced in November where Alistair Darling lowered VAT by 2.5 percentage points and increased the highest tax rate to 45%.
The chart attached shows the correlation between the drop in UK stocks and the decline in Sterling but yesterday the FTSE 100 index rallied for a second consecutive day after the dismal UK fundamentals bolstered speculation that the Bank of England will cut rates aggressively and revive the ailing economy.
The Euro is gathering momentum against the Pound and the single currency also made further gains versus the Dollar as we build up to the ECB interest rate announcement and accompanying press conference.
The European Central Bank are expected to slash borrowing costs by a further 50 basis points this month and it will be interesting to analyse Trichet’s comments in the press conference for clues on the probability of a further reduction in January as policy makers attempt to revive growth and boost lending.
The recent positive sentiment surrounding the Euro continued yesterday despite reports that European services also contracted at a record pace in November, while retail sales fell more than forecast and increased pressure on the ECB to suspend gradual monetary easing and cut dramatically in line with other central banks.
The Pound bounced back against the Dollar after global stocks advanced and rekindled risk appetite
The Pound rallied strongly against the Dollar yesterday, briefly trading back above $1.5000 on the session from a low of $1.4780 as global stocks advanced and rekindled an element of risk appetite that reduced demand for save haven currencies like the Dollar, Japanese Yen and Swiss Franc.
The dramatic and often aggressive swings in risk sentiment is driving the currency market at present and the correlation between stocks and the Pound’s performance against the majors is becoming increasingly apparent as the UK currency rallied following a 3.5% gain in the Standard & Poor’s 500 index.
The rebound in equities is supporting Sterling sentiment and the positive reaction in the stock market yesterday limited the Pound’s decline on Monday as the UK currency slipped from a high of $1.5510 versus the Dollar to $1.4800 by the close of the European session.
However, in early trade the Pound came under further selling pressure against the Euro, dropping to a low of 1.1700 after Bank of England policy maker Willem Buiter said that the Central Bank will need to weigh up the risks of triggering a collapse in the Pound as it cuts the benchmark lending rate this week.
In a speech at the Council of Mortgage Lenders annual conference in London yesterday, Buiter said that “the deterioration of Sterling we’ve seen so far has been extremely welcome but there is a risk that it could become a rout.”
The Pound has depreciated 25% in value against the Dollar so far this year and has fallen aggressively this week as investors weigh up the possibility of another aggressive cut in UK interest rates from the current 3.0% as policy makers attempt to limit the impact of a recession and revive spending.
Buiter’s comments reflect the tone of a recent statement by the former Chancellor of the Exchequer Norman Lamont who said last month that the Pound’s “very significant” decline wasn’t yet symptomatic of the crisis but warned that the government may risk triggering a run on the UK currency.
Nevertheless, Buiter went on to say that a currency crisis is a highly unlikely situation and he still expects his fellow policy makers to cut by an unprecedented 150 basis points this Thursday that would take the UK benchmark lending to just 1.5% and to the lowest level since 1951.
The deterioration in UK fundamentals has investors speculating on the prospect of a 200 basis points reduction on Thursday and we can expect the Pound to fluctuate aggressively against the majors in the build up to the monthly announcement.
The European Central Bank and the U.S Federal Reserve are also expected to reduce interest rates from their current levels and Buiter believes that the prospect of zero per cent interest rates in the North Atlantic region is increasingly possible in the new year.
The Pound also remained largely unmoved yesterday amid reports that the cost of hedging against UK losses on government bonds rose to a record level in the market for credit-default swaps, which suggests that investors are losing belief that the Treasury will be able to repay its debt.
In addition, UK construction contracts, which accounts for roughly 6% of gross domestic product, declined at the fastest pace since records began in 1997 as an index based on a survey of purchasing managers slipped to a reading of 31.8 as homebuilders battle the biggest slump in their industry for 25-years.
The seizure in credit markets has crippled the property market and weighed heavily on consumer spending as house prices dropped to the lowest level in three years, while significant falls in new orders, industry output and rising unemployment all contributed to a steady decline in the construction sector.
The Dollar declined by the most against the Euro in a week yesterday, while the U.S currency also lost ground versus the Pound as central banks acted to stem the impact of the global recession and subsequently reduced the appeal of safe haven assets.
The tentative swings in risk appetite will continue to hamper Dollar sentiment as the greenback fell 0.7% versus the Euro on the session as the Austalian Central Bank cut interest rates and is expected to be followed by the Bank of England, European Central Bank and Reserve Bank of New Zealand later this week.
In addition, the Dollar lost support amid reports that the U.S economy is now officially in a recession and may be in the midst of the longest economic slump since the Second World War as the unemployment rate accelerates and credit conditions tighten.
The slump in the economy began almost a year ago after payrolls reached a peak but the pro-active and monumental actions taken by the Federal Reserve means that the U.S are largely ahead of the curve on monetary policy and that will help bring the economy out of a recession quicker than initially anticipated.
Data Released 3rd December
U.K 09:30 CIPS Services PMI (November)
EU 09:00 Services PMI (November)
- Composite Index
EU 10:00 Retail Sales (October)
U.S 13:15 ADP Employment (November)
U.S 13:30 Productivity (Q3 Revised)
- Labour Costs
U.S 15:00 ISM Non-Manufacturing (November)
- Business Activity
U.S 19:00 Federal Reserve Bank Publishes Beige Book
Once again Senior Traders Adam Solomon and Luke Trevail analyse the week's foreign exchange market news to help you with your trading decisions.
This week:
A brief pound rebound
The UN economic report
A big week for economic data
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.
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 plunges against the majors after a slump in global slumps spurs demand for safe haven assets
The Pound plunged against the majors yesterday, relinquishing all of the gains from last week's unexpected upside move as the deteriorating market conditions and aggressive swings in risk sentiment sent the UK currency crashing towards its biggest one-day loss against the Dollar in over a month.
In addition, the Pound came under renewed selling pressure, falling under 1.1800 versus the Euro from a high of 1.2120 overnight, following reports that the UK housing and manufacturing sector fell further into negative growth last month and reinforced speculation that the Bank will cut interest rates this week.
UK house prices declined to the lowest level in nearly three years in November as the bank’s reluctance to pass on recent cuts in borrowing costs to consumers led to tighter lending conditions that starved the property market of credit.
The report from Hometrack Ltd showed that the average cost of a home in the UK fell 8.1% in the 12 months to November to £161,400 and to the lowest level since January 2006 as home values plunged 1.1% on the month, compared with a 1.3% decrease in October.
Elsewhere, a separate report from the Chartered Institute of Purchasing and Supply showed that UK manufacturing contracted at the fastest pace in at least 16-years in November as the index dropped to a reading of 34.4, the weakest since the survey began in 1992.
Manufacturing accounts for roughly 14% of UK gross domestic product and is currently suffering its longest streak of negative growth since 1980 as the result in November was well below initial forecasts and suggests that the slump may continue well into 2009.
The slump in factory output will place more pressure on the BoE to lower interest rates but factories may benefit from the overwhelming decline in commodity prices as oil has fallen roughly two thirds in value since July, while a weaker Pound may boost demand for British made goods.
The Prime Minister Gordon Brown has urged banks to free up credit in an attempt to revive spending and bolster economic growth, while the BoE governor Mervyn King has identified a boost in lending as the key ingredient in improving the outlook for the economy and bring it out of a recession.
The political and economical pressures are mounting on banks to implement measures to help spur lending and the Bank’s monetary policy committee are expected to lower interest rates to 2.0% this week and to the lowest level since 1951, as policy makers combat the recession and housing slump.
UK mortgage approvals fell beyond initial estimates in October, matching the lowest level since 1999, while the Organisation for Economic Cooperation and Development have predicted that the decline in housing will see the UK economy contract by 1.1% next year and by the most since the last recession in 1991.
The government appear poised to do “whatever is necessary” in limiting the impact of a recession and getting banks lending again, while Mervyn King has refused to rule out the possibility of nationalising UK financial institutions in radical efforts to revive credit and cutting the UK benchmark lending rate to zero per cent.
The Pound is likely to extend yesterday’s slump against the majors in the build up to the BoE rate announcement on Thursday but the UK currency was again susceptible to a renewed appetite for risk aversion as UK stocks dropped by the most in almost a month.
The Euro made significant gains against the struggling Pound yesterday but the single currency failed to cling to recent gains made versus the Dollar as investors flocked to the U.S currency as a relative safe haven amid renewed market turmoil.
Euro-zone manufacturing shrank as it did around the world with the financial crisis entering its 17th month, providing further evidence that the global economy is in the grip of a recession and placing further pressure on policy makers to react with further cuts in borrowing costs.
Factory production contracted in the U.S at the fastest pace in 26-years in November, while the equivalent index in the Euro-zone slumped and pushed down stocks that sent yields on U.S treasuries to record lows as investors sought the sanctuary of the safest assets.
The record drop in European factory output in the 15 nations that share the Euro showed that the PMI index dropped to a reading of 35.6 from 41.1 in October to remain below the expansion threshold for a sixth consecutive month.
Recent reports have indicated that the European economy has entered its first recession in 15-years and that has led to renewed calls for the ECB to accelerate the pace of monetary easing having reduced the benchmark lending rate by 100 basis points in this cycle.
The Central Bank’s governing council members are under pressure to implement an aggressive cut in rates this week but policy makers will probably cut by another 50 basis points with some members arguing that a gradual approach is needed to ensure that inflation expectations are anchored.
The retreat in global stocks helped the Dollar break back below $1.5000 against the Pound despite separate reports that U.S manufacturing also shrank in November and at the steepest rate in 26-years as a global industrial slump that began in the U.S spreads around the globe.
The chairman of the Federal Reserve Ben Bernanke said yesterday that he has limited room to lower interest rates below the current 1.0% and policy makers may have to utilise less conventional techniques, such as buying treasury securities, to revive the ailing economy. Data Released 2nd November
The Pound rallied higher against the majors as an element of risk appetite returned but can Sterling sustain that momentum this week
Following on from last week, the resurgence of risk appetite was reflected in the positive four day run in U.S stocks and a degree of consolidation on foreign exchange markets subsequently ensued as the Pound clawed back some gains versus the Dollar, rising to a high of $1.5510 despite fears of a crippling recession.
Short term money market rates are also showing some signs of improving liquidity and it will be interesting to see if the Pound can sustain its momentum over the coming week as the UK currency also made significant gains against the Euro, rising above 1.2100 despite speculation of a 75 basis point reduction in UK interest rates.
The Pound posted its biggest weekly advance against the Dollar in almost three years as a rebound in global stocks rekindled an appetite for higher-yielding currencies and that sentiment is perfectly illustrated in the UK currency’s performance against the Yen and Swiss Franc.
The FTSE 100 Index advanced by the biggest weekly amount in almost a month and the aggressive swings in risk sentiment is driving the currency market as the Pound lost 3.4% against the Dollar and 3.5% versus the Euro in November amid suggestion that the UK recession is deepening and forcing policy makers to cut interest rates again.
Nevertheless, the rebound in equity market has provided some strong and much needed support to Sterling in the near term at least but traders are increasingly pessimistic about the longer term prospects for the Pound and feel that the surprisingly rally will run out of steam towards the middle of the week.
Crucially the Pound also closed well above the so called Fibonacci retracement level at $1.5279 on November 25th and the UK currency has stubbornly remained well above this level, which indicates that Sterling could gain as much as 10% in value against 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 seizure in global credit markets and a deepening recession has sapped confidence in the UK economy and the Bank of England have had little option but to cut interest rates on four occasions over the past year from 5.50% to just 3.0%, the lowest since 1955, and investors are speculating on the size of the reduction this Thursday.
According to the BoE Governor Mervyn King and a host of policy makers, the biggest issue for the UK economy is getting banks to step up lending and actually pass on the full extent of the recent cut in UK interest rate cuts in an attempt to revive spending.
UK consumer confidence held at close to the lowest level in more than 30-years in November as the pessimism surrounding the outlook for growth intensified and falling home values elevated concerns about a recession that has deterred spending.
An index of sentiment rose one point to a reading of minus 35 and UK consumers are reeling from news about a poor economy in general, while mounting concerns over the escalating number of job losses means that the government’s decision to value added tax may still fail to boost spending.
The declining outlook for the UK economy and the looming prospects of the worst recession in decades has caused investors to raise bets on the probability of a period of deflation over the over months and that may undermine the Pound and prevent the current rally from gathering momentum.
Therefore, Euro and Dollar buyers would be well placed to take advantage of the current rate of exchange or at least place a working stop order in the market around $1.5250 versus the Dollar to protect against an adverse move this week.
The European Central Bank are also expected to cut its benchmark lending rate by 50 basis points this week and resist investor expectations of a bigger reduction in order to tackle the Euro-zone recession that may be as deep and prolonged as the slump in the UK.
ECB policy makers convene in Brussels on Thursday and will probably cut rates to 2.75% but there is some speculation that the governing council members will vote for a bigger reduction as the inflation rate plummets at the fastest pace in almost two decades and companies shed jobs.
Last week, Executive board member Lorenzo Bini Smaghi warned that "sharp" reductions in rates may exacerbate rather than oviate a worsening market sentiment and historically the Central Bank has adopted a more gradual approach to monetary easing, preferring to take their time in anchoring market and consumer expections accordingly.
The Dollar declined sharply against both the Euro and the Pound last week as a strong element of risk appetite returned to the market but it will be interesting to see if that trend is maintained over the coming week as fears for the global economy intensify and year end factors increasingly come into play.
In addition, there is a host of key data releases in the U.S this week with manufacturing and services ISM surveys scheduled, while the focus will fall on the non-farm payrolls numbers for the same month and the preliminary readings for retail activity over the Thanksgiving holiday.
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