The Pound enjoyed the single biggest intraday rally against the Euro on record yesterday, while the UK currency also made robust gains versus a basket of currencies amid speculation that the European Central Bank may be forced to continue the pace of monetary easing to limit the impact of the worsening recession.

Despite the fundamental lack of UK economic data, the Pound took advantage of broad Euro weakness as the ECB Vice President Lucas Papademos said that further rate cuts may be required should inflation keep slowing below the Central Bank’s target.

The record slump in European manufacturing combined with the seventh consecutive decline in retail sales has caused a lot of negative sentiment surrounding the outlook of the European economy and the Pound rallied as much as 3.4% on the session amid suggestions that the UK government will provide a guarantee for asset-backed securities.

The ECB is expected to revise growth forecasts lower over the coming months with the economy set to contract by more than the 0.5% anticipated, while Papademos also highlighted that inflation will “drop considerably” around the middle of the year with a zero per cent chance of deflation.

The Pound has also strengthened 0.5% against the U.S Dollar despite speculation that the Bank of England will lower UK interest rates to the lowest level in its history at 1.5% on Thursday despite the omission from the Nationwide Building Society that it will not pass on any further reductions to the consumer.

The government will therefore have to look at less conventional techniques to reinvigorate the economy and the BoE governor Mervyn King may have to follow the Federal Reserve in introducing a second stimulus package by expanding the £200 billion program that allows banks to swap illiquid securities for government debt.

Rising unemployment and tighter lending conditions have curtailed the pace of consumer spending and the primary objective for the Prime Minister Gordon Brown is to increase borrowing, while pledging to create as many as 100,000 new jobs.

The Pound’s significant recovery against the Euro has prompted speculation that the UK currency could extend its upside momentum and according to a report from Goldman Sachs Group Inc, the single currency is poised to decline by 10% versus a host of currencies including the Pound and the Dollar.

The Dollar also made a dramatic recovery against the Euro yesterday as the U.S currency rallied to a three week high and registered further gains versus the Yen amid speculation that President-elect Barack Obama will introduce a fiscal stimulus package that will help the U.S economy recover from a recession.

Obama’s rescue package will also include hundreds of billions of dollars in tax breaks to help revive consumer sentiment and the Dollar made gains amid suggestions that the U.S is ahead of the curve and will come out of the current slump a lot quicker than other struggling economies.

In terms of economic data, the Dollar also found support after construction spending fell less than half as much as initial forecasts in November, reflecting the gains in commercial and government building that has partially cushioned the slump in residential real estate.

The 0.6% decline followed a revised 0.4% drop the previous month that was also smaller than previously estimated but the downturn in real estate is likely to extend well into a fourth year as prices continue to slide and prospective buyers find it increasingly difficult to get credit.

The Dollar may struggle to extend its rally against the majors in the near term as the focus falls on the release of the minutes from the Federal Reserve’s last policy setting meeting, where policy makers took the unprecedented step in lowering interest rates to a range between zero and 0.25%.

Data Released 6th January

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

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

EU 09:00 Services PMI (December)

- Composite PMI

EU 10:00 HICP Flash (December)

U.S 15:00 Factory Orders (November)

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

- Business Activity

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

U.S 19:00 FOMC Minutes of 16th December Meeting

written by Adam Solomon

Labels: daily-insight