The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Lloyds 2008 Earnings Result.
Revised 4th quarter GDP figure released at 13:30 today.
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 remained under pressure yesterday, amid fears of a collapse in the UK banking sector
The Pound remained very weak in early trade yesterday, dropping under $1.4200 against the Dollar and falling to a low of 1.1134 versus the Euro, as escalating fears over the UK banking sector intensified, following the severe annual losses at the Royal Bank of Scotland Group Plc.
Nevertheless, confidence in the banking sector was supported to some extent by the government's plans to provide additional protection to struggling financial institutions, effectively easing the pressure from bad loans and toxic debt in a government supported insurance scheme.
RBS Plc will put £325 billion of investments into a state insurance program and shift toxic assets to a new unit after Britain's biggest government owned bank posted the largest loss in British history. The struggling bank will transfer roughly £540 billion of assets, including derivatives and loans on commercial and residential property to the new unit, mirroring the actions taken by Citigroup Inc in creating a 'bad bank'.
Following the reports, the share price in RBS and Lloyds Banking Group Plc rose more than 25% in London, as the government provided a bigger guarantee than initial estimates. The Prime Minister Gordon Brown has agreed to insure the distressed banks in an attempt to boost capital that will ultimately spur lending and bolster the economy.
The steps taken by the government yesterday is the latest indication that the Chancellor Alistair Darling is closer towards nationalising UK banks, as the Treasury allows its stake in RBS Plc to climb to 84% in return for guaranteeing £325 billion in toxic assets. The government are desperate to get banks lending again as the economy suffers its worst recession since the 1980s, while Darling will also want to keep some private ownership of RBS Plc and other banks.
The renewed optimism that the banking sector will stabilise saw the Pound recover some gains against the majors, rising to a high of $1.4380 by the close of trading last night. The near-term sentiment for the Pound will be influenced strongly by the trends in domestic banking and the aggressive swings in risk appetite that saw lower U.S equities trigger modest Sterling losses in New York.
In terms of economic data, the UK home values fell by the most in at least 18-years in February, as the pessimism in the banking sector and a worsening economic climate led to a restriction in mortgage finance, according to a report from the Nationwide Building Society.
The average cost of a home in Britain fell an annual 17.6% to £147,746, the biggest drop since the monthly data began in 1991, while home values slumped 1.8% on the month amid the biggest economic contraction since 1980.
The Euro is stuck in a tight trading range against the Dollar and once again failed to break above the key resistance at $1.2810, while the single currency retraced back towards 1.1250 versus the Pound, after the EC sentiment index showed that economic confidence had slipped to the lowest level on record in February.
Tighter lending restrictions and rising unemployment is putting increased pressure on the European Central Bank to step up its response to the financial crisis. An index of consumer sentiment plunged to a reading of 65.4 this month, as lending to households and companies slowed by the most in over five years.
European retail sales declined and the jobless rate in Germany rose for a fourth straight month as the tone of yesterday's data dashed any hope of stabilisation in the economy. The reports also increased speculation that the Central Bank will cut interest rates by 50 basis points in March, with a further protracted cut in April.
The Dollar is very susceptible to swings in risk sentiment and that is a theme that is likely to continue in the short-to-medium term but the U.S currency also came under some pressure yesterday after a barrage of weaker economic data pointed to a worsening recession.
New home sales plummeted to a record low in January, as soaring unemployment and rising foreclosures discouraged buyers, with purchases falling 10% to an annual pace of 309,000, the lowest level since the data was compiled in 1963.
Elsewhere, U.S durable goods orders declined for a sixth straight month in January, signaling that companies are slashing jobs and corporate investment, while initial jobless claims for unemployment benefits unexpectedly rose to a record high last week. Data released 27th February.
EU 10:00 Final Harmonised Index Consumer Prices (January)
The Pound declines against the majors after the UK economy contracts at the fastest pace since 1980
The Pound declined heavily against the majors yesterday, dropping under $1.4200 versus the Dollar, while the UK currency also dropped under 1.1200 against the Euro, following reports that the revised estimate of gross domestic product in the fourth quarter showed that the recession is deepening, fuelling speculation of a further reduction in borrowing costs.
According to the report from the Office of National Statistics, the UK economy contracted at the fastest annual pace since 1980, during Margaret Thatcher's first term as Prime Minister, as the escalating financial crisis saw consumer spending and business investment dwindle.
UK gross domestic product, in the three months through December, fell 1.5% from the third quarter, matching the preliminary estimate in January, as consumer spending declined 0.7%, the most since 1991, while fixed investment dropped 2.3%.
The Pound came under renewed selling pressure against almost all of the 16-most actively traded currencies as the report sparked an increase in risk aversion, despite the drop in GDP being marginally less than economists had anticipated, as a number retailers collapsed, including Woolworths Plc and JJB Sports Plc.
In addition, a separate gauge of the report showed that UK industrial production declined 4.5% on the quarter, up from the previous estimate of 3.9%, while manufacturing slid 5.1% and officials revised up their measure of the decline in service sector growth.
The UK economy is in the midst of the worst recession in almost thirty years and will need additional stimulus to stem the downturn and ward of the risk of deflation, according to Bank of England policy maker Andrew Sentence, while a spokesman for the Treasury said that "things are likely to get worse before they get better".
Sentence reiterated yesterday the persistent threat of price declines, increasing the prospect of a period of deflation in the UK, a sentiment echoed by the Deputy Governor of the BoE John Gieve, who that Britain faces the risk of a decade-long depression.
Both policy makers have also emphasised the need of government stimulus to stem the slide in growth and the Chancellor Alistair Darling has ordered Northern Rock Plc to expand lending by £14 billion, in an attempt to revive credit conditions and bolster spending.
The Prime Minister Gordon Brown is expected to announce further measures this week to support struggling financial institutions, including the Royal Bank of Scotland Group Plc, who are still fighting the threat of full nationalisation. The Bank of England are expected to cut interest rates by a further 50 basis points on March 5th to another historic low of 0.5% and policy makers have signaled that they want the power to create money to help stimulate the economy.
The Pound declined almost 2% in value against the Dollar yesterday amid suggestions that the recession will intensify in the first quarter of this year but the UK currency could still be on its way to a substantial upward correction over the medium term.
EU officials are increasingly concerned that the Pound's 23% slump against the Euro over the past year could destabilise the UK economy and policy makers must be alert to the possibility that the weakness in Sterling will just scare of foreign investors, according to Neil Mackinnon, Chief economist at ECU Group.
The Euro was unable to break above the resistance near $1.2900 against the Dollar yesterday, after Standard & Poor took the decision to downgrade Ukraine's debt rating, further enhancing concerns over the exposure of Eastern European economies. While fears that there could be further destabilizing losses with the banking sector also undermined confidence in the Euro.
However, the single currency took advantage of broad Sterling weakness, rising almost 1% on the session, despite reports that German exports plunged in the fourth quarter of 2008, sparking the biggest contraction in the economy in almost 22-years.
Exports dropped 7.3% from the previous quarter, as corporate investment dried up and the Euro may come under further selling pressure this morning amid the release of German unemployment data, which may show that the jobless rate rose again in February, while the EC sentiment index is expected to show a further decline in confidence.
The Dollar rose against the majors yesterday as the negative tone of economic data encouraged investors to seek the security of safe haven assets. The U.S currency also found support despite reports that existing home sales unexpectedly declined in January, even as falling prices made property more affordable.
Purchases fell 5.3% to an annual rate of 4.48 million, the fewest number since 1997, signaling that the worst housing slump in two decades is showing few signs of abating. Consumer's have been waiting for President Obama's plans to stem foreclosures and declining home values that are at the core of the economic slump.
The Dollar weakens against the majors, after the Fed chairman Ben Bernanke suggests that the recession will worsen
The Pound weakened yesterday against both the Euro and the Dollar, as the UK currency lost almost 1% in value versus its European counterpart, after UK mortgage approvals fell with banks granting just 23,376 loans for house purchases, indicating that the worsening property slump is pushing the economy deeper into a recession.
According to the report from the British Bankers’ Association, the number of new home loans was actually up from 22,416 in December, as the most aggressive cut in UK interest rates in history encouraged banks to step up lending.
House prices have fallen 17.2% from a year earlier, while mortgage approvals tumbling 43% from this stage in 2008, as the government introduces a series of new measures to revive the mortgage market, ordering Northern Rock Plc to expand lending by £14 billion.
A separate report also showed that business investment has slipped 3.9% in the fourth quarter of 2008, while the downside momentum surrounding the Pound intensified as UK stocks dropped as much as 2% on the session, creating an element of risk aversion that encouraged investors to come out of Sterling.
The FTSE 100 Index has lost 41% since the start of the year already as financial firms on a global scale notch up $1.1 trillion in credit-related losses and economies worldwide fell in to the first simultaneous recession since the end of the Second World War.
Bank of England policy maker Andrew Sentence added to the gloomy sentiment for the Pound, as he said that the UK may experience a prolonged period of deflation if the recession intensifies, adding to the case for the Central Bank to buy corporate bonds in an effort to stimulate growth.
The Bank's monetary policy committee have unanimously agreed to ask the government for the authority to create and pump money into the banking sector, after cutting interest rates to an historic low of 1%, which has seemingly failed to halt the decline.
Speaking at the Institute of Economic Affairs, Sentence said that recent reductions in borrowing costs should begin to take affect towards the middle of the year but "the risks are still weighed to the downside at this stage."
The most aggressive policy easing on record combined with a weaker Pound should help bring the UK out of the recession but the Bank of England's latest estimates show that the economy will contract at an annual pace of 4% by the end of the first quarter, while inflation will slow to 0.5% by the end of 2010, as falling prices increase the risk of deflation.
The Pound may come under some pressure this morning amid the release of the revised estimates of UK gross domestic product in the three months through December.
The report will probably reveal a greater contraction in economic growth than preliminary forecasts, while the UK currency may be susceptible from comments from the BoE governor Mervyn King and MPC member David Blanchflower,, who are scheduled to address Parliament on the banking crisis.
The Euro unexpectedly made versus against the Pound yesterday, while the single currency also bounced back against the Dollar amid speculation that the European Central Bank will refrain from pursuing quantitative easing policies, despite escalating tensions over the banking sector in Eastern European nations.
In terms of economic data, the Euro was unaffected by reports from the Ifo institute in Munich, who said that its index measuring German business confidence dropped to the lowest level in 26-years in February, as the worst recession since the Second World War ravaged the financial sector, prompting companies to slash jobs and curb production.
The index actually fell to a reading of 82.6 from 83.0 in January, the worst result since November 1982, despite expectations for the index to hold steady, following the government's decision to double the fiscal stimulus package to roughly €80 billion. While the Central Bank has given a very strong indication that the governing council will cut interest rates to a record low next month in the fleeting hope of a recovery later in the year.
Elsewhere, European industrial orders declined for a fifth straight month in December as the global slump in demand weighed heavily on export growth in the region, with orders falling 5.2% from November, marking the longest period of declines since the data was first published in 1994.
Chancellor Angela Merkel's stimulus program includes tax cuts and infrastructure investment, amounting to nearly 1.6% of gross domestic product, making it the biggest spending boost in Europe but the Euro may come under pressure this morning as the revised details of fourth quarter economic growth in the region will probably show a worsening slump.
The Dollar declined against the majority of the majors yesterday after U.S consumer confidence collapsed in February as the Conference's boards index dropped to the lowest level since the data began in 1967, sparking fresh concerns that the economy is heading towards a depression.
In addition, a separate report showed that U.S home values plunged again in December, with prices dropping 18.5% year-on-year in December, as banks seized real-estate and mounting foreclosures exceeded the all-time high of 2.7 million.
The Chairman of the Federal Reserve Ben Bernanke delivered his semi-annual testimony to the Senate and warned that the slump in the economy may last well into 2010. Bernanke urged policy makers to take "strong action" as the Obama administration attempts to revive confidence with a number of fiscal stimulus measures, aimed at creating jobs and helping homeowners.
The Pound rallied the highest level against the Dollar in two weeks after UK stocks rose 4.5% on the day
The Pound rallied to the highest level against the Dollar in two weeks yesterday, touching a high of $1.4650, before retreating back under $1.4500 at the close of the European session, while the UK currency also advanced against the Yen and the Euro amid speculation that banks are stepping up efforts to shore up their finances.
With the fundamental lack of economic data released, the focus switched back towards global stock markets and UK banking stocks gained after the Royal Bank of Scotland Group Plc released a statement, saying that it plans to cut costs by over £1 billion.
The UK's largest state controlled lender plans to split itself into two units and will reduce investment banking, while the Wall Street Journal reported that the U.S government may increase its holding in Citigroup Inc as the FTSE 100 Index jumped as much as 4.5% in early trade.
The buoyant mood in equity markets and the renewed appetite for risk sentiment drove the Pound higher against the majors with the UK currency touching a high of 1.1454 against the Euro. However, the Pound's resilience will be surely be tested later this week, before a report that may show the UK economy contracted in the fourth quarter, increasing the likelihood for a further reduction in borrowing costs.
The fourth quarter estimate for UK gross domestic product will probably show that the economy contracted 1.6% in the three months through December as the financial crisis intensified. However, the Pound may receive a boost should the government announce plans this week to insure banks against the losses on their assets.
Economists at Credit Suisse Group AG are speculating that the Pound could reach $1.4900 against the Dollar over the coming weeks but the tentative movement in global stocks could easily reduce the allure of Sterling. Dollar and Euro buyers would be well placed to take advantage of the current upside momentum or at the very least place a stop order in the market to protect against a possible retracement.
The Pound may come under some pressure as a report from the Confederation of British Industry may provide further evidence of the pessimism surrounding the retail sector, while UK homebuilders may announce a further £1.63 billon if writedowns to land holdings this year after falling prices all but wiped out profit margins.
The Euro was unable to sustain the recent gains made against the Dollar and weakened substantially during the European session yesterday, dropping a low of 1.2700 yesterday, as the single currency was undermined following comments from the ECB Chairman Jean-Claude Trichet, who said that the Euro-zone banking system was under severe strain.
His comments will reinforce concerns surrounding the prospect of an economic recovery in the region and the Euro may come under further selling pressure today amid the release of the German Ifo sentiment index this morning.
The index of business confidence in Europe's largest economy is expected to remain unchanged in February amid the government's stimulus program and interest rate cuts that have thus far failed to bolster sentiment, as lawmakers agreed last week to more than the double the fiscal package to roughly €80 billion.
The Dollar declined heavily against the Pound yesterday as global stocks rallied higher, while the U.S currency may come under further pressure today amid the release of the S&P/ Case Shiller index of house prices, which will probably show that prices declined 18.3% year-on-year in December.
The severity of the housing slump has pushed the U.S economy further into a recession and the Dollar may struggle to recover as the report will show the biggest annual decline since records began in 2001, while a separate report may show that U.S consumer confidence slipped to a reading of 35.2 in February.
Elsewhere, the chairman of the Federal Reserve Ben Bernanke is poised to deliver his semi-annual testimony to Congress this afternoon and economists will look to assess his stance on possible moves towards buying government debt and long-term inflation targets.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Dollar benefits from the increase of risk aversion.
UK home repossessions rose to the highest level in 12 years.
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 declined for a second week against the Dollar as the FTSE 100 Index dropped more than 6% on Friday
Following on from last week, the Pound declined for a second week against the Dollar as the FTSE 100 Index of equities dropped more than 6% by Friday, increasing demand for the U.S currency as a haven. While UK home repossessions rose to a 12-year high and the Bank of England Deputy Governor John Gieve said that Britain is threatened with a decade long recession.
Bank's took possession of 40,000 UK homes in 2008, up 54% from the previous year and the report from the Council of Mortgage Lenders also showed that the total will reach 75,000 this year, the highest number since 1991, as homeowners struggle to cope with the credit crisis, despite the most aggressive policy easing in history.
The Bank of England have slashed interest rates from 5% in October to a record low of 1% in February in a vain attempt to prevent the recession from deepening and will probably cut by another 50 basis points in March.
Gieve also indicated that the Central Bank will look at less conventional techniques to revive growth and have purchased £340 million in commercial paper during the first week of operations for its asset-purchase facility.
The commercial paper market is used by companies to cover day-to-day costs like rent and UK government bonds rallied on Friday as the fall in the stock market increased demand for the relative security of fixed-income debt.
In terms of economic data, the Pound found some support on Friday after a report from the Office of National Statistics showed that UK retail sales unexpectedly rose in January as companies slashed prices, supplementing the effects of rising job losses and a deepening economic slump.
Sales climbed 0.7% after a surprising 1.7% increase in December but economists seemed susceptible of the report and questioned the reliability of the data after the economy crumbled under the weight of the worst contraction since 1980, while retailers like Woolworths Plc closed its doors.
Elsewhere, the Prime Minister Gordon Brown urged banks to adopt a more realistic method of lending as they struggle to cope with the financial crisis and look to rebuild balance sheets with the help of taxpayers' money.
The Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc are both part-owned by the tax payer and have asked the government to insure nearly £500 billion of assets as part of the Treasury's plan to boost lending.
While Brown said that "we do want to see the reinvention of the traditional savings and mortgages bank in Britain, for loans to be made on prudent and careful terms, not just to people with large deposits."
There is a strong degree of risk aversion creeping back into the market as policy makers fight to protect the UK economy from the "serious risk" of a depression, like that suffered by Japan in the 1990s. Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishsi said that "any king of recovery in the Pound will look futile."
The UK currency fell back towards 1.1250 against the Euro on Friday and the Pound may come under further selling pressure as data released this week includes the CBI distributive trades survey, Nationwide house prices and consumer confidence. All of which are expected to to show sharp falls from the already depressed levels, while the revised estimates of UK gross domestic product will point to a worsening slump in growth.
The Euro slumped to the lowest level against the Dollar in three months, while the single currency pulled back some gains versus the Pound, despite speculation that the financial turmoil in eastern Europe may quicken the economic downturn in the 16 nations that use the Euro.
Moody's Investors Service exacerbated the negative sentiment for the Euro, saying that the credit ratings of Austrian, Swedish and other banks with subsidiaries in eastern Europe may be cut as economies in the region deteriorate.
The Euro subsequently declined 1.7% against the Dollar but the single currency recovered some of the losses after the German finance minister Peer Steinbrueck told reporters the following day that the larger nations in the Euro-zone would act should countries face problems and strongly rebuked any speculation of a break-up in the currency.
European Central Bank policy maker Lorenzo Bini Smaghi said that European Union rules will permit the EU to act as whole in helping member states in "economic difficulty". However, his comments are in contrast to a recent statement from his colleague Juergen Stark, who said that EU states can't be responsible for the debt liability of other member nations.
European manufacturing and service industries unexpectedly contracted at the fastest pace on record in February as the purchasing managers' index dropped to a report of 36.2, despite forecasts of a more modest decline towards 38.5, and the ECB will cut its benchmark lending rate below 2.0% in March, in an attempt to revive sentiment.
As the element of risk aversion stalks the market, the Dollar and the Japanese Yen advanced against the majors amid fresh concerns that the worsening losses at financial firms will increase demand for havens. Global stocks continued to decline as both Citigroup Inc and Bank of America Corp slumped to the lowest levels in over 18-years.
The Dollar is almost completely susceptible to swings in risk sentiment and the U.S currency may decline should equity markets rally this week. While the tone of economic data still points to a worsening recession as new home sales probably sank to a record low in January and durable goods orders declined for a sixth straight month.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
GBP strengthens against the other high yields - AUD and NZD
Euro testing resistance level around 1.16
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 rallied against the majors yesterday after global stocks advanced for the first time in five days
The Pound continued to make gains against the Euro yesterday, while the UK currency also advanced by the most in a week versus the Dollar, after UK stocks rallied for the first time in five days, spurring demand for riskier assets.
The correlation between the Pound and aggressive swings in risk sentiment continues to dominate the market with UK banking stocks rallying, as gilts fell and BNP Paribas SA said that it will be profitable this year, reducing demand for fixed-income assets.
The revival in global stocks is supporting the Pound in the near-term and that trend may continue amid speculation that the downward move against the majors was over exaggerated and all of the bad news for Sterling has already been priced into the market.
The Pound subsequently rallied to a high of $1.4448 versus the Dollar before dropping back towards $1.4200 at the close of trading last night, but investors are still anticipating a move towards $1.4600 by the end of the third quarter.
The increased demand for British assets may continue to rise as investors take advantage of a weaker Pound, which has lost 23% in value against the Euro over the past year. While the government’s efforts to revive the economy may actually work in bringing the UK out of the worst recession in decades.
The pro-active nature of the Bank of England and the aggressive cuts in UK interest rates since October is in contrast to the European Central Bank’s stance on monetary policy. The Pound is rallying against the Euro on speculation that the economic recovery in the UK will be quicker than in the Euro-zone.
Nevertheless, the BoE has publicly stated that the impact of monetary easing is limited. Policy makers have sought government approval to create money and purchase commercial paper that may increase demand for corporate bonds denominated in Pound as appose to Euros.
Elsewhere, the Pound relinquished much of the earlier gains against the Dollar following reports that Britain had a £3.3 billion budget surplus in January, the smallest for the month in 14-years, as the financial crisis curtailed bank profits and the recession deepened.
The surplus compares with £13.9 billion a year earlier and the figures highlight the damage inflicted by the financial crisis as the Prime Minister Gordon Brown faces the biggest budget deficit since modern records began in 1970.
In terms of economic data, the focus this morning will fall on the release of the UK retail sales numbers for January and the report from the Office of National Statistics is expected to show that sales declined 0.1% on the month, as consumer’s rein in spending and unemployment rises.
The Euro rallied from near the lowest level in three months against the Dollar as speculation eased that Eastern European banking losses will deepen regional turmoil. The single currency rebounded for the first time in four days after Goldman Sachs Group Inc said that the Euro will increase more than 6% against the Dollar to $1.3500 over the coming weeks.
The Euro lost 1.7% in value against the Dollar to trade at a low of $1.2513 on Tuesday, following reports that Moody's Investors Service raised concerns that the financial turmoil in periphery European states like the Ukraine and Poland may slow growth in the countries that use the single currency.
There is renewed optimism for the Euro amid speculation that the European Union will bail out member states in financial turmoil and there is a reduced probability of an economic break-up, which means that countries are less likely to defect away from the Euro.
The Dollar came under pressure against the majors yesterday as global stocks rallied for the first time this week, while the worsening tone of economic data pointed to a deepening recession. The Philly Fed Index showed that manufacturing output in the Philadelphia region contracted in February at the fastest pace in over 18-years.
Employment sales plummeted to the lowest level on record as the economic index dropped to a record of minus 41.3 this month, lower than initial estimates, while U.S producer prices climbed unexpectedly in January as companies tried to boost earning at the start of the year, amid weakening demand.
The Pound declines to the lowest level in two weeks versus the Dollar after the MPC voted 8-1 in favour of cutting interest rates to 1%
The Pound declined to the lowest level in two weeks versus the Dollar yesterday but the UK currency remained largely unchanged against the Euro following the release of the minutes from the Bank of England's last policy setting meeting, which showed that all of the members voted unanimously to cut UK interest rates in February.
The monetary policy committee, led by the governor of the Central Bank Mervyn King, voted 8-1 to cut the benchmark lending rate to an historic low of 1.0% with David Blanchflower the sole voice for a greater 100 basis point reduction, arguing that the "lower bound" of the rate should be reached "without delay".
The remaining members of the nine-strong committee defeated Blanchflower, believing that a more aggressive cut in rates may hurt the economy and banks' profit. While the Deputy Governor Charles Bean has said this week that the BoE may begin buying government debt because the most aggressive period of monetary easing in British history has failed to revive the economy.
Blanchflower dismissed the argument and reiterated that there are other ways for lower interest rates to boost the economy that did not rely solely on the banking sector, saying that "historically, policy errors had been made by cutting too late rather than too soon".
The minutes also showed that policy makers discussed the benefits of so-called quantitative easing measures in February as the economy stumbles towards the largest contraction since 1980, while UK consumer prices are expected to slow below the government's 2.0% target this year, sparking fears of a period of deflation.
There is a growing belief that interest cuts are not providing the necessary stimulus to bring the economy out of a recession and the minutes stated that policy makers will need to use alternative policy measures including the purchase of government bonds and other securities, financed by the creation of Central Bank money.
The Bank of England have recently predicted that the UK economy will contract at an annual pace of 4% by the end of the first quarter, while inflation will slow to just 0.5% by the end of 2010. The minutes showed that policy makers are very concerned with inflation dropping under 2.0% and that may encourage policy makers to stop cutting rates after a projected 50 basis point reduction in March.
The Pound continued to make gains against the Euro yesterday but the UK currency struggled versus the majority of 16 most actively traded currencies, after reports in the Daily Telegraph showed that the UK's credit rating may be lowered by Standard & Poor's as the government steps up borrowing to bailout banks.
Together with the negative tone of the minutes, the report in the Telegraph will act as another variable to encourage traders to sell Sterling, while UK stocks fell for a fifth day with the FTSE 100 Index reaching the lowest level in three months on concerns that the global recession is deepening.
Nevertheless, the Euro has come under renewed selling pressure this week and that may continue in the near-term, amid concerns that the European Union will only be able to play a limited role in financially supporting Eastern European countries like Ukraine, Croatia and Poland.
The Monetary Affairs Commissioner Joaquin Almunia said that the EU cannot provide non-member countries with the same kind of assistance which may be available to EU members and would be willing to "coordinate the kind of support this is needed to avoid a deepening of the crisis" with member states including Austria.
The extent of the downturn in economic growth in Eastern European countries has prompted speculation of a delayed recovery in the Euro-zone and the single currency extended its losses against the Pound after construction output fell by the most since 1995 last year.
The global economic slowdown has curbed demand for new buildings and homes across the Euro-zone as construction fell 10% year-on-year in December, the biggest decline since 1991, resulting in a full-year contraction of 2.7%, as tighter credit conditions slowed new development.
The Dollar rallied against the Euro yesterday, to the highest level in almost three months, after the U.S President Barack Obama pledged $275 billion to help stem the mounting number of foreclosures, with the plan intended to help as many as 5 million homeowners to refinance conforming loans guaranteed by struggling financial institutions like Fannie Mae and Freddie Mac.
In terms of economic data, the Dollar remained resilient and almost completely reliant on risk sentiment the U.S currency shrugged off reports that builders broke ground on the fewest number of new homes on record as the fundamental lack of credit and plunging sales exacerbated the worst housing slump since the Great Depression.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Smaller than expected reduction in CPI
Further Euro weakness
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 rallies for a third straight day against the Euro after UK inflation contracts less than expected
The Pound rallied for a third straight day against the Euro, while the UK currency also registered gains against the majority of the 16 most actively traded currencies after a report from the Office of National Statistics showed that the annual pace of UK inflation fell last month by less than initial forecasts.
Consumer prices rose just 3% from this stage in 2008, compared with 3.1% in December, and although the rate fell to the lowest level in nine months, the modest decline in fuel and food costs has left the Bank of England with less scope to cut interest rates towards zero per cent.
However, a separate gauge of the report showed that retail price inflation slowed to just 0.1% in January, the lowest level since March 1960, from 0.9% in December and although the move was largely due to cheaper mortgage costs, the extent of the decline has sparked concerns over a possible period of deflation.
The governor of the Bank of England Mervyn King has acknowledged that with interest rates approaching zero, the Central Bank will be forced into creating money to pump into the economy in order to prevent inflation from falling too far below the government's 2.0% target.
Inflation will slow to 0.5% in 2010, according to recent estimates from the BoE, after consumer prices breached the government's 3.0% upper limit last year and oil prices surged to a record high of $147.27 in July. However, the deepening financial crisis has led to a sustained fall in prices that has reduced demand for fuel and sent commodity prices tumbling.
Tighter lending restrictions has curtailed the pace of consumer spending and together with the rising jobless rate has sent the UK economy spiralling into a deeper recession. However, falling prices take time to respond to the downturn in economic growth and it won't change the Bank of England's stance on monetary outlook, with policy makers set to reduce borrowing costs by another 50 basis points in March.
The Bank's monetary policy committee have reduced the benchmark lending rate from 5% in October to a record low of 1% in February, the lowest level since the BoE was founded in 1694, and the governor Mervyn King has conceded that policy makers will need to look at less conventional techniques to revive the economy.
The government has given the Bank of England the mandate to begin buying commercial paper from struggling companies under a program financed by the sale of government securities. King also indicated that the Bank may also increase money supply by purchasing government and corporate bonds and will consider the decision at the next policy announcement in March.
Nevertheless, The Pound rallied on speculation that the Central Bank will slow the pace of interest rate cuts, despite forecasts from the Confederation of British Industry that the economy will contract by 3.3% in 2009 and 4.5% from the start of the recession in the third quarter of last year, almost as much as in the early 1980s during Margaret Thatcher's first term as Prime Minister.
Elsewhere, the Pound rallied 1.6% in value against the Euro as news broke that the government will cut bonuses at the Royal Bank of Scotland Group Plc by more than 90% and eliminate them for many executives in a bid to end the "rewards for failure" scheme.
The biggest government owned bank has lost a record £28 billion in 2008 and the executives responsible will receive no bonuses, according to a statement from the treasury, while the government will impose a pay freeze for directors and all other pay rises will be below the rate of inflation.
In terms of economic data, the Pound's resolve will be tested this morning amid the release of the minutes from the Bank of England's last policy-setting meeting, where the MPC elected to cut rates to 1% and the tone of the report may provide some insight into the probability of a further reduction in March.
The Euro declined against Sterling yesterday and also fell below $1.2600 versus the Dollar for the first time since early December, amid suggestions that Moody's Investors Service will cut the credit ratings of several banks with units in Eastern Europe as the financial crisis deepens and delays an economic recovery in the region.
The single currency declined 1.5% against the Dollar yesterday as the statement by Moody raises concerns about the financial security of Eastern Europe, as the Polish Zloty traded at a near record low versus the Euro and there are renewed concerns that the banking system in the Euro-zone is at risk.
In addition, the pessimism surrounding the outlook for the European economy was further illustrated by a report from the EU, which showed that the region's trade deficit had widened the largest level since the Euro's introduction in 1999, as higher oil prices over the period boosted energy costs and the global slump curtailed the pace of exports.
The gap in goods and services was €32.1 billion last year, compared with a surplus of €15.8 billion in 2007 as the global recession curbs demand for European based products, adding to speculation that the economy will continue to shrink by the most in 15-years.
Elsewhere, the Euro failed to find any support as the German ZEW index for investor confidence rallied by the most in over 15-years in February to reflect the government's injection of capital and signs that the European Central Bank are prepared to cut interest rates to a record low.
The revival in risk aversion has helped the Dollar rally to the highest level in almost two months versus the Euro as stock markets continued to fall for a fourth straight day, increasing the appetite of the Dollar and Yen as safe haven assets.
The Dollar also remained strong despite reports that the New York State manufacturing index contracted in February at the fastest pace on record in December, signaling that the recession is deepening despite government efforts to increase capital.
Data Released 18th February
U.K 09:30 BoE Monetary Policy Committee Minutes of 4/5 March Meeting
U.K 11:00 CBI Industrial Orders (February)
U.S 13:30 Export Prices (January)
- Import Prices
U.S 13:30 Housing Starts (January)
- Permits
U.S 14:15 Capacity Utilisation (January)
U.S 14:15 Industrial Production (January)
U.S 19:00 FOMC Publishes Minutes of 27/28 January Meeting
The Pound declined against the Dollar after UK stocks plunged and created an element of risk aversion in the market
The Pound declined against the Dollar yesterday, dropping under $1.4200 by the close of trading last night, while the UK currency also remained in a tight trading range versus the Euro after the Group of Seven finance ministers failed to provide any reference to Sterling in the statement after the weekend meeting in Rome, indicating that policy makers won't seek to limit the Pound's losses.
In addition, the Pound came under further selling pressure after a report from the Confederation of British Industry showed that the UK economy will contract by almost twice as much as initially anticipated, providing the Bank of England with further scope to continue cutting interest rates towards zero.
The shortfall in credit is delaying a possible economic recovery with the most aggressive period of monetary easing in British history seemingly having little effect as the economy plunges deeper into the worst recession for at least thirty years.
According to the business lobby, UK gross domestic product will shrink 3.3% this year, instead of the 1.7% forecasted in November and by the end of 2009, the economy will have contracted for six consecutive quarters as the global crisis in confidence leads to reduced investment and a cut in jobs.
The Prime Minister Gordon Brown has already pledged billion of Pounds in an attempt to get banks lending again and revive the ailing UK property market but with unemployment rising at an alarming rate, the CBI expects economic growth to contract 4.5% from the start of the recession in the third quarter of last year.
The statement from the CBI also highlighted that government net borrowing will expand to £148.7 billion in the next financial year and will rise to 11.8% of GDP the following year despite recent predictions from the Chancellor Alistair Darling that borrwing would only be 8% of the economy in the year ending March 2010.
The Pound subsequently fell a further 0.8% versus the Dollar in the aftermath of the statement and was further hampered by reports from Rightmove Plc, which showed that UK home values plummeted in February with the average asking price recording the biggest annual fall since at least 2002.
House prices will probably decline 15.5% this year, while unemployment expected to rise by more than 3 million people by the second quarter of 2010, from 1.97 million at the end of last year, and there are concerns that the worsening economic climate will damage Britain's long-term growth prospects.
The negative tone of the reports also sent stocks plunging for a third straight day, with the FTSE 100 Index losing 1.2% amid speculation that Lloyds Banking Group Plc may require a further capital injection to avoid nationalisation as the bank's share price plunged 22% on the day.
The decline in stocks increased demand for safer assets, including the U.S Dollar, and the Pound will remain susceptible to swings in risk sentiment, while speculation over another 50 basis point cut in March will continue to undermine confidence in Sterling.
The Bank of England Governor Mervyn King said last week that the monetary policy committee may pursue full quantitative easing measures should credit markets remain locked and that would mean the Bank would create money and use it to buy securities such as government and corporate bonds.
That sentiment was echoed by the Deputy Governor Charles Bean yesterday who said that policy makers "will probably need to take action to return inflation to target in the medium term and may want to expand the range of assets purchased under the scheme to include government debt".
Bean also conceded that the Central Bank are running out of room to cut interest rates even as the economy is poised to weaken further and Britain is facing the worst recession among the Group of Seven nations, according to estimates from the International Monetary Fund.
The Euro failed to take advantage of broad Sterling weakness yesterday as the threat of a severe economic downturn continues to weigh on the single currency, while Steven Pearson, an economist at Merrill Lynch, said that the banking sector's exposure to Eastern Europe is also a negative for the Euro.
Nevertheless, the European Central Bank remains reluctant to step up the pace of monetary easing and governing council member George Provopoulos said yesterday that policy makers haven't discussed buying government bonds in the secondary market despite mounting pressure to following the Federal Reserve and Bank of England.
In terms of economic data, the Euro may find some support this morning as the ZEW index for investor confidence is expected to show a modest improvement on the month in February but with the economy contracting at the fastest pace on record, the ECB will probably cut interest rates again in March from the current 2.0%.
The rise in risk aversion sent the Dollar higher against the majors yesterday depite the U.S President's Day holiday and that is a theme that may continue this week despite a raft of economic data that is expected to reveal a worsening recession.
U.S consumer prices probably posted their first annual decline since 1955 as the cost of living dropped 0.1% in the 12 months through January, while a separate report may show that new home contruction declined further with builders braking ground on the fewest number of houses since records began in 1959.
The Pound may decline against the majors amid a 40% drop in the share price of Lloyds Banking Group Plc
The Pound rallied against the Dollar on Friday, snapping a three-day decline versus its U.S counterpart, while the UK currency also registered gains against the Euro and Japanese Yen following a revival in the UK stock market that sparked a demand for riskier currencies.
The benchmark FTSE 100 Index rose by the most in a week early on Friday amid speculation that government’s efforts to revive global growth will increase investors’ appetite for risk. The Pound remains susceptible to aggressive swings in equity markets and the early increases in banking stocks were positive for the UK currency.
In addition, the Pound had been gaining in support in the build up to the G-7 meeting in Rome over the weekend where it was expected that European Finance Ministers would take issue with a weaker Pound benefiting a UK economic recovery and Sterling subsequently advanced 0.8% versus the Dollar to a high of $1.4385.
French and German finance ministers were expected to confront the Chancellor of the Exchequer Alistair Darling over the Pound’s decline and ask him to consider taking action to boost the Pound, according to an article in the Daily Telegraph.
Darling told reporters in Rome that UK banks are best run privately and the government has already put in place a program to help struggling financial institutions as the Chancellor attempts to curtail speculation that the government is about to take a majority stake in Lloyds Banking Group Plc.
Lloyds share price dropped 32% last week after the struggling bank admitted that it expects HBOS Plc, the UK lender it took over in January, to report a pretax loss of approximately £10 billion. Lloyds CEO Eric Daniels conceded that the bank would have done "three to five times" more due diligence on the government-brokered takeover had it not been for time constraints.
The statement from the Group of Seven finance chiefs vowed to tackle a “severe” economic downturn that will persist for most of 2009, while the members neglected to spell out steps in how to do so but were insistent that they would restore confidence in markets and revive the world economy.
The volatility in stocks will continue to drive the Pound this week but the weakening tone of UK fundamentals may also play a part with the Royal Bank of Scotland Plc expected to cut 20,000 jobs and pull out of several emerging markets as it announces losses in excess of £30 billion, according to the Sunday Times.
In terms of economic data, the focus this week will fall on the release of the minutes from the Bank of England’s last policy-setting meeting with the Bank’s discussions scrutinised for any clues on the prospect of another cut in UK interest rates next month.
Elsewhere, the consumer price index on Tuesday is expected to show that the annual pace of inflation in the UK decelerated to 2.7% from 3.1% the previous month, while second tier data due for release includes the Rightmove and DCLG house price surveys.
The Euro has been under pressure against the majors as the worsening tone of economic data indicates a worsening recession and ECB policy makers signaled that they are in no hurry to step up their response to the lack of credit by using unconventional methods such as buying mortgage-backed securities.
Policy makers are downplaying the economic health of some nations in the Euro-region and the Euro has been declining against the Dollar amid suggestions that their reluctance to step up the pace of monetary easing will see the economy slip behind the curve in terms of an economic recovery.
The Central Bank is under pressure to follow the Bank of England and the U.S Federal Reserve in purchasing government or corporate debt as the Euro-zone economy faces the worst recession since the end of the Second World War. Investors have also increased bets that the price of a banking bailout and stimulus packages will strain public finances and cripple governments' ability to meet bond payments.
The Euro may continue to decline this week as the focus switches back to European fundamentals that should provide further confirmation of a deepening economic slump but the German ZEW index of investor confidence is forecasted to show a modest improvement from the record low level in December.
The Dollar remains susceptible to aggressive swings in risk sentiment and the U.S currency may benefit from the pessimism surrounding Lloyds Banking Group Plc as investors flock to the relative haven of the greenback as banking stocks tumble.
It is a holiday shortened week in the U.S with the President's Day holiday but there is a raft of significant economic data due for release with the Empire State manufacturing index expected to contract further into negative growth, while inflationary data this week will continue to emphasise the downward pressures on consumer prices.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Late gains on the Dow Jones on Thursday 12th of February.
Sterling moving forwards against the Euro.
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 declines for a third straight day against the Dollar amid concerns that the recession is deepening
The Pound declined against the majors for a third consecutive day yesterday, as the UK currency plummeted to a low of 1.1025 versus the Euro and 1.4256 against the Dollar amid renewed concerns that the UK economic slump is worsening, as policy makers prepare to cut interest rates again in March and the current environment sapped demand for riskier assets such as stocks.
The Bank of England have cut its UK growth forecasts and inflation expectations to indicate that policy makers expect significant downside risks to the economy over the coming months, while the governor Mervyn King conceded that the most aggressive period of monetary easing in the Bank's history may fail to revive sentiment.
The government have given the Bank of England unprecedented powers to buy corporate bonds and bad debt in a measure known as quantitative easing, which is considered a last ditch attempt by the government to shore up the banking system and the Pound is declining amid speculation that interest rate cuts and a weaker currency will help boost the economy.
The Pound fell a further 1.1% in value against the Dollar yesterday, while the UK currency also lost ground versus the Japanese Yen and Swiss Franc as the FTSE 100 index of stocks dropped 0.8% in London as a report from the Council of Mortgage Lenders said that loans for home purchases fell last year to the lowest level since 1974.
Tighter lending conditions has seen UK home sales fall across the country and restricted consumer spending as unemployment soars to the highest level in a decade. The Prime Minister Gordon Brown has announced a series of initiative designed to encourage failing companies' to step up hiring in the face of the worst recession since the end of the Second World War.
The tone of Mervyn King's statement on Tuesday indicated a severe economic problem and although a period of quantitative easing will eventually help the economy, the Pound is under pressure in the near-term and investors are already speculating on the probability of Sterling reaching $1.3500 versus the Dollar over the next quarter.
Nevertheless, a lot of bad news has already been priced into the Pound and although the UK currency is struggling in the near-term there are still significant economic problems in the Euro-zone as the ECB prepares to cut interest rates by another 50 basis points in March, the Chairman Jean-Claude Trichet said yesterday that he backed a stronger Dollar.
The Euro has been susceptible to the worsening economic climate with many countries in the region falling into a deeper recession and the single currency may continue to decline against the Dollar in the near-term amid speculation that the U.S bank bailout will fail and renew appetite for the U.S currency as a haven.
The Dollar is headed for a weekly gain against both the Pound and the Euro as investors deliberate on U.S efforts to stimulate the economy and speculation that the historic stimulus plan won't be enough to avoid a deep and prolonged recession, which is spurring demand for the relative safety of U.S treasuries.
U.S lawmakers have agreed on a $789 billion package of spending and tax cuts, smaller than the $838 billion that the Senate approved earlier this month and the Dollar may climb in the near-term as the Treasury Secretary Timothy Geithner dodges questions on the plan and takes time to work out the details of the strategy aimed at helping the financial industry.
In terms of economic data, the Dollar also found support after a government report showed that the U.S retail sales unexpectedly halted a six-month decline in January, although the advance may not be sustained after the number of Americans filing for unemployment benefits reached the highest level ever recorded.
Elsewhere, house prices dropped by the most on record in the fourth quarter as mounting foreclosures dragged down values and the the worsening recession reduced the number of buyers as the median price of a home slumped 12% to $180,100 from a year earlier.
Congress are poised to give the final seal of approval on the plan today after lawmakers tweaked the details of the proposal and worked out last minute disagreements over compensation and taxes, while finance ministers from the G-7 are scheduled to meet in Rome today to discuss exchange-rate developments.
The Pound tumbles against the majors amid a raft of negative economic data and comments from the governor of the Bank of England
The Pound continued to tumble against the majors yesterday, falling towards a low of 1.1058 versus the Euro, while the UK currency also breached 1.4300 against the Dollar as the pessimism surrounding the outlook for the economy intensified and the Bank of England governor Mervyn King conceded that the UK is slipping into a "deep recession".
Following the release of the Central Bank's quarterly inflation report, King gave a statement saying that the recent measures being taken, including cutting interest rates to the lowest level in history, may not be sufficient in reviving lending conditions that has dragged down consumer spending and brought house sales to the lowest level since 1978.
In a statement to reporters, a beleaguered King said that "we can't be confident that over the next year the measures taken by governments around the world will actually improve the ability of the banking system internationally to lend."
The Bank of England also cut its forecasts for UK gross domestic product yesterday and inflation as King said that risks to growth remain "heavily to the downside" as the government struggles to cope with the banking crisis with the UK economy expected to contract at annual pace of 4% by the end of the first quarter.
The Pound subsequently declined 1.2% in value against the Dollar and the downside momentum was further enhanced after a separate report showed that UK unemployment rose in January to the highest level in nearly 10-years with the number of people out of work and receiving jobless benefits rising by 73,800 to 1.23 million, the most since July 1999.
The claimant count for December was also revised higher to 79,900 from 77,900, while the unemployment rate rose to 3.8% in January, the most since February 2000, as the number of UK-born workers in jobs fell 278,000 to 25.6 million in the year through the fourth quarter.
The report from the Office of National Statistics showed that the jobless number increased for the 12th month in succession and the downturn in labour market conditions threatens to erode support for the Prime Minister Gordon Brown, who earlier this week indicated that the UK may be heading towards a depression.
The government have given the Bank of England the mandate to create money and pump it into the economy after an aggressive period of monetary easing that has seemingly failed to revive lending and Brown has been forced to look at less conventional techniques to bolster sentiment.
The Central Bank have cut borrowing costs to an historic low of 1.0% and King indicated yesterday that policy makers would reduce rates by another 50 basis points in March, while Gordon Brown promised to inject £500 million designed to encourage companies to step up hiring and pledged further assistance to boost lending.
Recent economic data has indicated that the UK economy slumped by the most in at least 20-years in the official estimates for the fourth quarter and a report from the British Retail Consortium yesterday confirmed that almost 6,000 companies posted the weakest set of results since the survey was compiled in 1989.
Retail sales fell an annual 3.3% in December, the worst performance in the past 14-years, and the truly dreadful tone of the report has led to speculation that the Bank of England are running out of ideas and with unemployment spiraling higher, the government will have to look at the benefits of quantitative easing to improve the outlook for growth.
The reaction in the market to Mervyn King's comments and the extraordinary downbeat economic data has led to a reversal in the Pound from the end of last week and sellers of Sterling may wish look at measures to limit the loss on the currency with significant support at 1.0800 versus the Euro and $1.4000 against the Dollar.
The pessimism surrounding the outlook in Europe had seen the Euro decline significantly against the majors last week but the single currency has remained largely unchanged versus the Dollar this week despite the negative tone of economic data in the Euro-zone and the prospect of the worst recession since the end of the Second World War.
The ECB's governing council members are seemingly locked in disagreement on the extent of how far they should cut interest rates and the vice president Lucas Papademos said yesterday that officials will probably cut again in March and indicated that he would support the use of less conventional techniques.
The Central Bank have been reluctant to follow the U.S Federal Reserve and the Bank of England in cutting European interest rates towards zero per cent but Papademos accepts that the worst of the crisis may be not be over and policy makers must be prepared to buy corporate bonds to stimulate the economy.
The Dollar has been largely susceptible to swings in risk sentiment of late and the U.S currency has been under pressure amid plans to introduce a fiscal stimulus package that U.S lawmakers finally agreed upon yesterday with a projected $789 billion injection of capital that is designed to halt the economy from sliding deeper into a recession.
Following weeks of debate and negotiations, the Senate majority leader Harry Reid told reporters last night that members had reached an agreement on the proposal that he claimed would create 3.5 million jobs and the house may vote on the plan as early as today.
However, the Dollar and the Japanese Yen may strengthen in the weeks ahead as investors become skeptical about success of the plan in rescuing the banking system from its current plight and that will increase demand for the currencies as a safe haven. Data Released 12th February
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Further rise in the Jobless Rate.
Bank of England quarterly Inflation Report.
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 declined heavily against the majors yesterday as UK home sales dropped to the lowest level since 1978
The Pound declined heavily against the majors yesterday, dropping towards 1.1150 versus the Euro and under the 38.2% Fibonacci retracement level at 1.1277, while the UK currency also registered sharp losses versus the Dollar, falling to a low of $1.4401 on the session amid speculation that the Bank of England will cut to near zero per cent in March.
A survey from the Royal Institution of Chartered Surveyors showed that UK home sales dropped to the lowest level since records began in 1978 with the average number of transactions in a survey of real estate agents and surveyors dropping to a reading of 9.9, while a separate report showed the slowest increase in retail growth since 1995.
The Pound remained under pressure throughout the course of the day after a government report showed that the UK trade deficit shrank in December to the smallest in 18 months as the Pound declined 23% against the Euro in 2008 and boosted exports to countries outside the European Union.
Former Bank of England policy maker Sushil Wadwani also said yesterday that the failure of authorities to prevent an asset boom has left the economy facing a possible depression, a sentiment echoed by the Prime Minister Gordon Brown, while the Central Bank will need to implement "shock and awe" tactics to fight the recession.
The monumental reversal in the Pound was exacerbated by the decline in the UK stock market yesterday and the extent of negative economic data as the UK currency lost 1.9% in value against the Dollar but Morgan Stanley said yesterday that the Pound is close to fair value against the majors and traders should halt short positions.
The deteriorating economic climate means that the Pound is susceptible to the ongoing financial crisis and a raft of weakening data as a government report this morning will probably show that UK unemployment rose last month amid a worsening recession with the number of people receiving jobless benefits rising by another 89,000.
In addition, the Pound came under further selling pressure in the build up to the Bank of England's quarterly inflation report this morning, which may show that inflation dropped under the Bank's 2.0% target, while revised economic growth forecasts will probably show that the economy drifted in a deeper recession in the three months in December.
The degree of the decline in Sterling sentiment yesterday has increased speculation that the upside move to a high of 1.1540 versus the Euro was over exaggerated and the UK currency has also suffered widespread losses against the majority of the majors, including the Dollar, in anticipation of the data released this morning.
The Euro took advantage of broad Sterling weakness yesterday, while the single currency also rallied against the U.S Dollar despite reports that Germany's inflation rate dropped to the lowest level in nearly 5-years in January as the recession deepened and oil prices plunged, which will increase pressure on the ECB to cut interest rates aggressively in March.
The annual rate of harmonised consumer prices declined to just 0.9% from 1.1% in December to match the lowest level since 2004 and Alexander Koch, an economist at Unicredit MIB in Munich, said that inflation expectations may approach zero within the next six months.
However, as long as deflationary pressures don't manifest itself then the European Central Bank won't be too concerned and the chairman Jean-Claude Trichet signaled last week that policy makers will lower rates under the current 2.0% in March to counter Europe's worst recession since the end of the Second World War.
That sentiment was reflected in comments from ECB governing council member Guy Quaden yesterday who said that he's "absolutely ready" to lower interest rates below 2.0% "given the prospects of significantly deteriorating activity and low inflation."
The Dollar registered sharp gains against the Pound yesterday despite the projected announcement that the Senate had approved a $781 billion economic stimulus package designed to improve stability and renew confidence in the financial sector that should weaken the Dollar amid an increase in risk appetite.
The Pound rallies for a fifth straight day against the Euro as Barclays report first quarter earnings that exceed analysts' expectations
The Pound rallied for a fifth straight day against the Dollar yesterday, rising to a high of $1.4985 on the session, while the UK currency also held on to the recent gains made versus the Euro amid speculation that the Bank of England’s quarterly inflation report will show a slight upturn in consumer prices, reducing the likelihood of a further cut in rates.
The rebound in sentiment in the financial sector has drastically improved the allure of the Pound as the UK currency climbed to the highest level in three weeks following reports that Barclays Plc announced second half earnings that far exceeded initial expectations.
Despite threats of nationalisation at the beginning of the year and the extreme fluctuations in share prices, the President of Barclays Plc, the third biggest UK bank by assets, said that the investment bank has had an “extremely strong” start to 2009 following the successful acquisition of Lehman Brothers Holdings Inc assets.
Barclays Plc reported its results over a week ahead of schedule as the CEO John Varley attempts to curtail speculation surrounding credit market losses that wiped out 31% of the bank’s share price in the last month but earnings were boosted by a tax-related gain of £2.26 billion from the purchase of Lehman assets.
Following the statement, Barclays Plc share price rose 11% in London amid suggestions that credit writedowns this year will be less than the £8.1 billion in 2009 and the positive tone of the report seems to suggest that earlier concerns on the future of the bank were greatly exaggerated.
The Pound strengthened a further 1.0% in value against the Dollar yesterday and the momentum may see the UK currency breach $1.5000 over the coming days but the near-term strength in Sterling may be tested amid the release of the Bank of England inflation report as revised estimates for economic growth will signal a deepening recession.
The growing belief that policy makers are nearing the end of its rate cutting cycle is supportive to the Pound in the near-term and the UK currency has gained 9.3% against the Euro this year but is susceptible to economic imbalances and financial sector developments over the coming weeks.
The Euro has been under pressure against both the Pound and the Dollar and that trend is likely to continue as the single currency remains susceptible to weakening economic data with the ECB’s reluctance to step up the pace of monetary easing raising speculation that the Central Bank are behind the curve in terms of an economic recovery.
European finance ministers are becoming increasingly concerned that many nations within the Euro-zone are finding it difficult to borrow in financial markets as budget deficits swell and the recession deepens and the Euro may continue to struggle against the majors amid weakening demand for government bonds.
According to a confidential report prepared for this week’s Group of Seven nations meeting, the widening gap between interest rate differentials in the Euro-zone is of particular concern to some members of the ECB’s governing council, including the Luxembourg finance minister Jean-Claude Juncker.
The Dollar and the Japanese Yen slumped against the majority of the majors yesterday amid speculation that the government’s proposed stimulus package will aid an economic recovery and will limit losses at U.S banks, reducing the demand for the Dollar as a haven.
The Treasury Secretary Timothy Geithner is expected to announce the results of the proposal today and the Senate is expected to pass the plan that will provide stability to financial markets and weaken the Dollar.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Bank of England Quarterly Inflation Report
Quantitative Easing Measures from Bank of England to help revive the economy.
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 advances for a second week against the majors amid speculation that the Bank of England are nearing the end of its rate cutting cycle
Following on from last week, the Pound advanced against the Euro for the second week in succession, rising to a high of 1.1540 on Friday, amid suggestions that UK interest rate cuts will help bring the economy out of a recession faster than the rest of Europe, while the UK currency also strengthened against a basket of currencies.
The Bank of England elected to lower interest rates to yet another historic low at 1.0% last Thursday as economists argued on the potency of another cut but the monetary policy committee remained vigilant and the Pound rallied amid speculation that we are nearing the end of the rate easing cycle.
The BoE governor Mervyn King said last week that the UK economy is in the throes of a “severe” recession and that cuts in borrowing costs, fiscal stimulus measures and a weaker Pound will help boost the ailing the economy that has been ravaged by the worst financial crisis since the Great Depression.
The government have given the Bank of England unprecedented powers to begin a period of quantitative easing as the most aggressive period of monetary easing in history fails to stimulate the economy and the Central Bank said on Friday that it may start buying commercial paper this week through its asset purchase facility.
The move improve struggling companies’ access to credit as rate approach zero per cent and the Bank of England may acquire debt of companies that make a “material contribution to economic activity in the UK” while the Central Bank may also consider buying corporate bonds.
The significance of the announcement marks a shift away from the conventional techniques used to revive growth as interest rates fall to a record low and the UK economy is expected to shrink by the most since the end of the Second World War in 2009 as financial institutions ration credit to rebuild their balance sheets.
According to a recent report from the National Institute of Economic and Social Research, the UK economy has plummeted into a deeper recession in the last quarter of 2008 with gross domestic product contracting 1.7%, compared with 1.5% in the previous estimate, and the government’s attempt to revive growth have yet to bear fruit.
The Prime Minister Gordon Brown, who previously said that the UK was better positioned to come out of the recession than other nations, is desperate to get banks lending again and has pledged hundreds of billions of Pounds since October in an effort to bail out struggling institutions such as Barclays Plc and Royal Bank of Scotland Plc.
The Pound rallied 0.7% against the Euro last week as the contrast in policy responses gets bigger with the European Central Bank deciding to keep interest rates unchanged and investors have sold the Euro amid speculation that Europe are behind the curve in terms of an economic recovery.
In terms of economic data, the focus this week will fall on the Bank of England’s quarterly inflation report on Wednesday as the index will provide an update on UK economic growth and inflation forecasts, as well as the medium term outlook for monetary policy.
The Pound enjoyed a good week versus the Euro with the next Fibonacci retracement level at 1.1602 but the UK currency may come under some pressure if the tone of the report shows greater downward revisions to GDP than initial forecasts.
The Euro also struggled against the Dollar last week as the chairman of the ECB Jean-Claude Trichet reiterated his reluctance to take interest rates to zero per cent, while the single currency came under renewed selling pressure following reports that German industrial production dropped the most since records began 18-years ago.
The Euro is very susceptible to negative economic data and that trend may continue this week with the flash estimate of Euro-zone GDP in the fourth quarter expected to emphasise concerns on the outlook for growth, while industrial production reports for December are unlikely to bolster sentiment.
However, the Bank of France Governor and ECB governing council member Christian Noyer seems to share Axel Weber’s optimistic view of the economy saying that lower commodity prices, reduced interest and government stimulus packages will bring the World’s major economies out of a recession by the end of the year.
The Dollar dropped 2.0% versus the Pound last week as President Barack Obama edges closer towards his monumental economic stimulus package and the plan to release at least $780 billion to prevent the economy from sinking into a deeper recession will reduce the demand of the Dollar as a safe haven.
The U.S Senate is poised to vote early this week on the proposal and the majority leader Harry Reid expressed confidence that the measure would win approval after Democrats and Republicans agreed on a compromise that reduced its cost by more than $100 billion.
The Dollar also declined on Friday after the monthly U.S employment report showed that non-farm payrolls plunged another 598,000 in January, the biggest monthly drop since December 1974, while the Unemployment rate rose to the highest level since 1992.
The Pound rallies strongly against the majors amid speculation that the Bank of England are coming to the end of its rate cutting cycle
The Pound made substantial gains against the majors yesterday, rising above the 38.2% Fibonacci retracement level at 1.1277 versus the Euro for the first this year, while the UK currency also advanced against the Dollar after the Bank of England cut interest rates to a new historic low and appear to be coming to the end of the easing cycle.
The Bank's monetary policy committee was expected to lower interest rates by 50 basis points but in the build up to the lunchtime announcement, a number of economists had argued the benefits of a further reduction in borrowing costs and the negative impact it would have on savers.
Nevertheless, policy makers, led by the governor Mervyn King, extended the most of aggressive period of monetary easing by dropping the benchmark lending rate to a new historic low of 1% as officials try and limit the impact of the worst UK recession since the end of the Second World War.
According to recent economic data, the UK economy will contract this year by the most since 1946 and the International Monetary Fund forecasts that Britain will be the most affected by an economic slump as the government gives the Bank of England unprecedented powers to spend up to £50 billion on corporate bonds and commercial paper.
The Central Bank are reaching the end of its rate cutting cycle as the potency of a rate reduction is having limited effect in helping bolster economic growth but the accompanying statement yesterday said that "the global economy is in the throes of a severe recession and that cuts in borrowing costs, fiscal stimulus measures and a weaker pound will boost growth".
In the aftermath of the rate announcement, HSBC Holdings Plc said that it will pass on the reduction to the "vast majority" of its consumer mortgage and small-medium sized businesses, while Halifax also said that it will pass on the change to clients with standard variable and tracker mortgages.
The Pound subsequently rallied against the Dollar and the Euro with the next Fibonacci level at 1.1602 versus the single currency but the Pound may struggle to consolidate on the gains beyond the medium term with the Bank of England expected to present revised economic growth forecasts next week with the minutes of the meeting released on February 18th.
James McCormick, global head of currency at Citigroup Inc, said that policy makers have already done a lot to improve lending conditions and that we may be moving into a short period of rates on hold as "the Pound may be reaching a bottom".
The Bank of England have now lowered UK interest rates by 4 percentage points since October, while the U.S Federal Reserve have reduced its key rate to a range between zero and 0.25% but the European Central Bank have thus far been reluctant to step up the pace of monetary easing and decided to hold at 2.0% yesterday.
The Prime Minister Gordon Brown has been adamant that the UK is better prepared to overcome the threat of a recession but he conceded yesterday that the world is suffering a depression and suggested that he may need to increase measures to stimulate the economy after pledging hundreds of billion of Pounds to prop up the banking sector.
The Euro declined against the majors yesterday, falling to a low of $1.2749 versus the Dollar, after the European Central Bank elected to keep interest rates on hold at 2.0% after four reductions since October and policy makers are clearly waiting to assess the impact of the recession before a likely cut in March.
The Chairman of the Central Bank, Jean-Claude Trichet, reiterated on numerous occasions since January that the next "significant" meeting would be in March as some members of the governing council, including the Bundesbank President Axel Weber, express reluctance to follow other central banks and that may mean that Europe are behind the curve in a recovery.
Nevertheless, Trichet has conceded that the degree of the slowdown will probably force policy makers to cut again to 1.5% next month and the Euro is declining amid suggestions that the ECB have not grasped the severity of the recession and that will mean that than economic recovery will take longer in the Euro-zone.
In the aftermath of the announcement, Trichet held his usual press conference to explain the decision and declared that it would be "inappropriate" to cut interest rates to zero per cent as the financial crisis and government rescue of European banks has raised concerns over a cross border banking collapse.
The Dollar declined against the Yen and the Pound yesterday as we build up to the monthly U.S employment report this afternoon and the U.S currency may come under further pressure as unemployment probably climbed in January to the highest level since 1992 and non-farm payrolls dropped to the 13th consecutive month.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Bank of England Rate announcement
Sterling gains against both Euro and US Dollar
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 rallies against the majors after UK service industries contract at a slower pace than expected
The Pound rallied against the Euro yesterday to find strong resistance at the 38.2% Fibonacci retracement level at 1.1277, while the UK currency also made strong gains against a basket of currencies, including the U.S Dollar after a government report showed that UK service industries contracted by less than expected in January.
An index based on a survey of UK service companies from the Chartered Institute of Purchasing and Supply showed that sentiment marginally increased to a reading of 42.5 in January, from 40.2 in December and although the result was marginally better than forecasts, service industries contracted for the ninth successive month.
The Royal Bank of Scotland Plc faced the very real threat of nationalisation in January as the struggling bank said last month that it may post the biggest loss ever by a UK company, prompting the government to increase it's stake in the lender, while the Bank of England continue to cut interest rates to the lowest level in its history.
The government increased its stake in the struggling bank to 70% in January amid projected losses of up to £28 billion in the last fiscal year and that prompted Moody's Investors Service to cut the bank's AAA credit rating amid concerns that RBS and Barclays Plc will announce more credit losses and toxic debt.
The restriction in credit has pushed the UK economy into a deep recession and the government's primary objective is to increase confidence in the banking sector and unlock credit markets through an aggressive period of monetary and quantitative easing measures such as the purchasing of corporate bonds and "bad debt".
According to the Nationwide Building Society, UK consumer confidence has sank to the lowest level since at least 2004 in the past month as the tightening credit conditions restricted lending, while the rising unemployment rate left many consumers struggling to find disposable income.
According to a report from the International Monetary Fund, the UK economy is more susceptible the global slump but the Pound remained resilient yesterday after a separate report from the National Institute of Social and Economic Research said that the economy will contract 2.7% in 2009 as escalating credit crisis shows few signs of improving.
Nevertheless, the Pound continued to make gains through the course of the day following the upbeat report on UK service industries but the focus of attention will inevitably fall on the Bank of England interest rate announcement this lunchtime and the monetary policy committee are expected to lower rates by a further 50 basis points to 1%.
Despite speculation over another aggressive easing in UK borrowing costs, the Pound has found support through economic data and Geoffrey Yu, a currency strategist at UBS AG, said that "the Pound may be finding the floor" as "a lot of bad news has been priced into the market and the Pound is undervalued according to it long-term trend."
However, from a technical perspective the Pound is struggling to break above the Fib level at 1.1277 versus the Euro and although the outcome of the Bank of England's rate decision has been priced into the market, Euro buyers may wish consider placing a stop order in the market to protect against a downward move.
The Euro also came under renewed selling pressure against the Dollar yesterday, falling to the lowest level in two months amid concerns that the economic slump in Eastern Europe will push the Euro-zone in a deeper recession, while the ECB will probably signal today that it plans to cut interest rates again in March.
The ECB's governing council members have been divided in their recent rhetoric on the need to step up the pace of monetary easing but the Central Bank is expected to leave the benchmark lending rate on hold at 2.0% after the Chairman Jean-Claude Trichet reiterated that the next significant meeting will be in March.
The declining sentiment for the Euro is gathering momentum after European retail sales slumped by more than economists forecasts in December as consumer confidence collapsed in the face of the worst recession since the Second World War with sales plunging 1.6% from a year earlier after a 2.6% decline in November.
Consumers are reining in spending as rising unemployment derails sentiment and tighter lending conditions restrict borrowing, eroding confidence in the outlook for the UK economy as sentiment fell to a record low in January, while inflation eased to the slowest since 1999, giving the ECB the scope to cut below the 2.0% ceiling.
The Dollar declined heavily against the Pound and the Japanese Yen yesterday despite reports the ISM index of non-manufacturing companies, which showed that growth in services shrank at a slower pace than initially anticipated in January but the surprising increase probably won't last as unemployment soars.
According to a report report from the ADP Employer Services, U.S companies cut an estimated 522,000 jobs in January, following a revised cut of 659,000 the previous month, as the recession continues to worsen and the tone of the report may provide an indication of the non-farm payrolls number on Friday, which are expected to show an increase in the jobless rate.
The Pound declines against the majors as worsening economic data points to a worsening recession
The Pound continued to decline against the Euro for a second day yesterday, while the UK currency also slipped against the Swiss Franc and Australian Dollar amid speculation that UK economic data released this week will add to recent evidence that the economy is slipping deeper into a recession.
The Nationwide house price index will probably show that prices plunged in January, while consumer confidence is also expected to fall to near record low levels and a report yesterday showed that factories raised prices at the slowest pace in at least a year, indicating that inflationary pressures are moderating to a degree that will signal further rate cuts.
A report yesterday also showed that the construction industry shrank in January and the reports combined will prompt speculation of another 50 basis point reduction in the Bank of England's interest rate announcement tomorrow with policy makers slashing borrowing to just 1% and the lowest level in its history.
The Bank of England said yesterday that it accepted £287 billion in its emergency lending programs for banks stung by links to the collapse of U.S subprime mortgages and by the worst financial crisis since the Great Depression.
The BoE initially anticipated that struggling institutions would require around £50 billion of government aid from the debt swap, which it set up following the funding shortage at Northern Rock Plc, which led to the first run on a UK bank in more than a century.
The Chancellor of the Exchequer Alistair Darling said that the UK government remains open to creating a "bad bank" to buy toxic assets and securities held by banks, saying that "we have set up an insurance scheme and we have certainly not closed the door on a bad bank scheme".
Michael Klawitter, a currency strategist at Dresdner Kleinwort, who previously said that the Pound will come under renewed downside pressure in the coming weeks, said yesterday that "given the combination of UK specific and global risks, we further scope for the UK to disappoint or even a currency crisis."
Klawitter said last week that the Pound may reach parity against the Euro in the first quarter and also slump towards $1.2000 versus the Dollar over the coming months but he did concede yesterday that Sterling may find some near-term support because a lot of short positions have already been built.
However, a statement yesterday from Geoffrey Yu, a currency strategist at UBS AG, contradicts this view as he said that "a lot of bad news (for Sterling) has already been priced in and the Pound is undervalued according to it's long-term trend" but he also stated that many investors are waiting for the outcome of the Bank of England rate decision tomorrow.
The Pound declined modestly against the Dollar yesterday, while the single currency got perilously close to the psychologically important support level at 1.1000 versus the Euro following reports from the National Institute of Economic & Social Research, which showed that UK gross domestic product will drop 2.7% in 2009.
Elsewhere, a separate report from the Chartered Institute of Purchasing & Supply showed that the index for UK service sector growth was little changed at a reading of 40.3 in January, close to the lowest level since 1996, but the PMI report this morning is expected to show that growth in the industry improved modestly in January.
The Euro remains vulnerable to the worsening economic climate as the single currency failed to consolidate on the gains against the Dollar amid reports from the HDE Retail Federation, who said yesterday that retail sales in Germany will fall by up to 1% this year as unemployment continues to rise almost twice as much as initial forecasts in January.
The Dollar declined against the majority of the 16-most actively traded currencies as the U.S currency briefly traded above $1.3000 as efforts to revive the global economy reduced demand for the greenback as a relative haven as the Fed extended its emergency loan program and foreign currency swap lines by six months.
In terms of economic data, the Dollar may struggle to rebound against the Pound as the ADP employment index is forecast to show that the economy lost a further 525,000 jobs in January and the report may provide an insight into the non-farm payrolls numbers on Friday.
The Pound slumps against the majors after Barclays Plc's credit rating was downgraded two levels amid fears of more writedowns and bad debt
The Pound's rally against the majors came to an abrupt end yesterday as the UK currency declined for the first time in six days against the Dollar and fell by the most versus the Euro since December after Barclays Plc's credit rating was severely lowered, while investors sold Sterling in anticipation of another cut in UK interest rates this Thursday.
Shares in Barclays Plc declined 11% in London after Moody's investors service cut the bank's long-term debt rating by two levels, citing the possibility of yet more credit writedowns and bad debt but the accompanying statement said that the outlook for Barclays is "stable" despite share prices declining by 38% since the turn of the year.
Barclays turned down government aid towards the end of last year and confirmed that it wrote down about £8 billion of credit assets in 2008 but the Chief Executive John Varley said last week that the struggling bank won't need to raise more capital following the successful acquisition of North American assets following the collapse of Lehman Brothers.
UK banks are expected to lose more capital on securities linked to the U.S subprime mortgage crisis and will lose more on loans to homeowners in Britain as the repossession rate almost doubled in the third quarter, which indicates that banks including Barclays Plc and Royal Bank of Scotland Plc will face a 50-75% chance of nationalisation.
The Pound subsequently fell from a high of $1.4505 on Friday to a low of $1.4170 against the Dollar over night, while the UK currency also retraced back towards 1.1000 versus the Euro and that trend may continue this week amid the release of economic surveys that will probably show that house prices, consumer confidence and manufacturing slumped.
In addition, the producer price index is forecast to show that factories raised prices at the slowest pace in at least a year and that will provide the Bank of England's monetary policy committee to continue cutting interest rates to a new historic low this Thursday of just 1%.
Despite speculation that the Pound's decline last month was over exaggerated, there are still inherest downside risks to the UK currency and the economic outlook is not supportive of Sterling with some economists betting on parity versus the Euro and $1.2000 against the U.S Dollar.
The Euro came under renewed selling pressure versus the Pound yesterday, while the single currency also registered sharp losses versus the Dollar after German manufacturers' confidence fell to the lowest level in the Euro-region, as the index of manufacturing output in Germany slumped to 79.6 in the three months to January.
The Euro may be poised to drop to the lowest level in eight weeks versus the Dollar before a report this morning shows that European producer prices fell in December for the fifth straight month, providing the European Central Bank with the scope to cut interest rates further in March and to the lowest level in the Central Bank's history.
The ECB President Jean-Claude Trichet reiterated in an interview at the World Economic Forum in Davos last week that the Central Bank's next significant meeting is in March, signaling that policy makers will keep rates unchanged at 2.0% on Thursday.
The Dollar declined against the Yen yesterday but the renewed appetite for risk aversion saw traders flock back to the U.S currency as a relative safe haven and the Dollar made gains against the majority of the majors despite reports that U.S manufacturing shrank by more than anticipated last month.
Elsewhere, U.S consumer spending also fell in December, the sixth consecutive monthly decline, capping the worst performance since 1961 as the 1% drop in purchases was larger than forecast and indicates that the slump will continue over the coming months and compnaies slash payrolls and unemployment continues to rise.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Sterling rebounds despite poor economic data
50 point cut expected from MPC, ECB not expecting cuts
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 rallied to the highest level in two weeks versus the Euro following a rebound in banking stocks
Following on from last week, the Pound rallied to the highest level in two weeks versus the Euro, while the UK currency also posted significant gains against the majority of the majors, rising to a high of $1.4500 versus the Dollar on Friday after banking stocks climbed 18% on the week following a near collapse earlier this month.
Shares in Barclays Plc rebounded after the struggling bank released a statement saying that the acquisition of North American assets following the bankruptcy of Lehman Brothers Holdings has generated more revenue than had been initially anticipated, warding off the threat of nationalisation.
In addition, the Pound also found support, rising higher against the higher-yielding currencies on Friday amid suggestions that the House of Representatives are poised to approve President Barack Obama’s unprecedented stimulus package and inject about $815 billion in the financial sector.
The dire tone of UK fundamentals has increased the pessimism for the UK economy but a government report on Friday showed that UK mortgage approvals unexpectedly increased in December with lenders granting 31,000 loans for home purchases, compared with 27,000 in November.
Although the number of new home loans has climbed, the value of mortgage approvals fell to £8.7 billion in December, the lowest level since 1999, while net lending secured on homes doubled from November to £1.9 billion.
The rising appetite for risk has helped Sterling recover gains and the UK currency was looking increasingly oversold as the re-introduction of short-selling drove the Pound lower but the move was perceived as over exaggerated and got a boost from rising banking stocks, although the outlook remains tentative.
Following last week’s upside move, the Pound posted a record monthly gain versus the Euro, rising 8.1% on the month but the UK currency declined 1% in value against the Dollar in January, to record the seventh monthly decline in succession, the longest run of losses since 1983.
The Pound came under renewed selling pressure against the Dollar on Friday after UK consumer confidence plunged to a near record low in January as the the Gfk index of sentiment fell to a reading of minus 37 and the UK currency may struggle to consolidate on recent gains made against the majors amid considerable downside risks to growth.
The International Monetary Fund said last week that the UK economy will contract roughly 2.8% this year, more than any of the other Group of Seven industrialised nations, while global growth will almost halt as over $2 trillion of toxic assets in the U.S curtails the pace of economic expansion worldwide.
The statement from the IMF was in stark contrast to comments from the UK Prime Minister Gordon Brown last year, who said that the economy will recover quicker than other nations and Brown finally conceded in Parliament last week that the UK is entering a "deep recession" and the government will act to soften the effects.
Speaking at the World Economic Forum in Davos, Switzerland Brown also spoke about the risks of targeting an exchange rate for the Pound, saying that history has shown the strategy to be flawed despite Sterling falling to the lowest level since 1985 versus the Dollar as the government runs up debt and the economy sinks into a recession.
The focus this week will inevitably fall on the Bank of England interest rate announcement this Thursday with the monetary policy committee expected to cut borrowing costs by a further 50 basis points to a new historic low of 1% despite the minutes from the previous meeting showing some reservations in terms of the scale of monetary adjustment.
Remarks from some committee members, including staunch dove David Blanchflower has indicated a willingness to lower rates further should deteriorating economic conditions warrant it and data released this week may weigh on Sterling sentiment with manufacturing and services expected to remain at very weak levels.
The Euro has declined heavily against the both the Pound and the Dollar towards the end of last week despite speculation that the European Central Bank will elect to hold interest rates at the current level on Thursday with Jean-Claude Trichet indicating on more than one occasion that the next key meeting will be in March.
Nevertheless, the tone of the accompanying press conference will be closely watched for any indication on policy as economic data continues to point to a deepening and prolonged recession, while data released this week will probably show that industrial production slumped to a near record low in January.
The fresh concerns over the outlook for the Euro-zone was highlighted by governing council member Nout Wellink, who told journalists over the weekend that the global financial crisis is not yet close to ending despite comments from the Bundesbank President Axel Weber who said that growth may rebound in the third quarter.
The Dollar and the Japanese Yen have recorded their biggest monthly gains against the Euro since October, while the U.S currency stemmed the flow of losses versus the Pound amid further evidence that the global economic crisis that has increased the appeal of the Dollar as a relative safe haven.
The Dollar's resolve will be tested amid a busy week in terms of economic data and the focus will be on the monthly U.S job report this Friday and following a drop in 524,000 payrolls in December, the forecast is for another decline of 520,000 with the unemployment rate expected to increase to 7.5%.
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