Following on from last week, the Pound enjoyed its biggest weekly advance against the Euro since the single currency’s introduction in 1999, while Sterling also recorded substantial gains versus a basket of currencies, including the Dollar, amid speculation that the UK economy will recover quicker than initially anticipated.

The Bank of England cut interest rates to just 1.5%, the lowest level in the Central Bank’s history, but with UK banks not prepared to pass on any further reduction in borrowing costs, the government will have to look at less conventional techniques to revive the economy.

The latest 50 basis point cut in the benchmark lending rate was the smallest reduction of the past three and the Pound rallied amid speculation that the BoE is nearing the end of its rate cutting cycle as the government announced that it could steer responsibility on monetary policy away from the Central Bank if rates approach zero per cent.

The Pound also posted its largest five-day advance versus the Dollar since 1989 despite the latest round of interest rate cuts and even as the Office of National Statistics raised prices at the slowest annual pace in year, while manufacturing extended its worst slump in almost three decades.

The correction in the Pound-euro exchange rate has led to suggestions that the market will not reach parity this year with economists suggesting that the short-term momentum will propel the Pound above 1.1400 versus its European counterpart and latterly to 1.1900 by the end of the year.

The Pound also rose a further 1.3% in value on Friday to record a weekly gain on 7.7%, while the UK currency also strengthened 4.3% against the Dollar over the course of the week to $1.5167 and according to the head of market analysis at Schneider FX, the Pound will gather further momentum going into this week.

In terms of technical analysis, the Pound smashed through the major support at 1.1115 and that level represents a 38.2% retracement of the Euro’s upside rise to a record high of 1.0201 on December 30th from the October 20th low of 1.2997, according to a series of numbers known as the Fibonacci sequence.

In terms of economic data, a report from the National Institute for Economic and Social Research showed that the UK economy shrank at the fastest pace in nearly 30-years during the fourth quarter as gross domestic product fell 1.5%, compared to a drop of 0.6% in the third quarter.

The extent of the contraction represents the worst quarterly contraction since 1980 as the recession worsened and industrial output slumped to the lowest level since the steel workers strike in the same year, while the restricted lending restriction has starved households and companies of credit.

Bank’s reluctance to step up borrowing in the wake of the aggressive round of interest rate cuts over the past four months has exacerbated the slump in the UK property market and driven up unemployment as the number of people out of work exceeded the 1 million mark.

There is a sparse supply of economic data released this week as the focus falls on the RICS house price survey and the BCC quarterly manufacturing index, both of which aren’t expected to reveal much optimism, but the Pound has proved resilient to the dismal tone of UK
fundamentals recently and that may continue this week.

The dwindling sentiment surrounding the outlook for the European economy saw the Euro fall by the most against the Dollar since October as the dire tone of economic reports provokes speculation that the ECB will lower interest rate later this week.

European borrowing costs will probably be cut to 2.0% on Thursday and to the lowest level since 2005 as policy makers combat a recession that has ravaged the Euro-zone economy and the single currency may continue to weaken in the build up to the announcement.

European stocks slumped impressively after six consecutive days of gains, while the Euro depreciated 3.3% to $1.3476 on Friday, as an element of risk aversion returned to the market and this week’s data releases from the region are likely to support the case for further reductions.

German gross domestic product will highlight the downturn in economic growth in the latter part of 2008 and the report comes in the aftermath of comments from Bundesbank president Axel Weber who signalled that the economy may contract by more than initial forecasts as the recession worsens.

Data Released 12th January

No Data of Significance

written by Adam Solomon

Labels: daily-insight