The Pound declined against the Dollar for a fourth day, as equity markets declined
GBP/USD GBP/EUR
The Pound declined against the Dollar for a fourth consecutive day, as gilts rose and equities dropped, whilst an industry report showed that financial services companies may lose as many as 15,000 jobs in the second quarter. UK stocks fell, sending the FTSE 100 Index to its biggest drop in four weeks, following reports that the U.S government said that some banks will need further government stimulus.
In addition, lower commodities prices weighed on mining and oil shares, while banking stocks also lost ground. Barclays Plc slumped 14% on the day, as Societe Generale SA said that the government could end up owning up to 67% of the struggling bank, as it recommended selling shares. The FTSE sank 3.5% yesterday, to record the biggest loss since March 2nd, but the gauge has still climbed 7.1% from the yearly low.
Banks from Barclays to Citigroup Inc said that they had a positive and profitable start to the year, while the U.S Treasury Secretary Timothy Geithner unveiled plans to rid struggling financial companies of toxic assets and bad debt. However, the recent drop in equity markets has encouraged investors to seek the security of Dollar denominated assets, as an element of risk aversion creeps back into the market.
According to David Fineberg, a senior trader at CMC Markets Plc in London, said yesterday that "the financials are struggling and crude oil prices are tumbling back towards $50 as the news acts as a stark reminder that there's no quick fix to the economic malaise".
The Pound slipped to its lowest level in nearly two-weeks against the majors, as we build up to the G-20 summit in London on April 2nd, where the leaders of advanced and emerging economies prepared to meet and discuss a global approach to financial regulation. Yesterday's decline against the Dollar has put the Pound on course for its third straight quarterly loss, the longest stretch of declines since December 2005.
The UK currency may come under further selling pressure in the build-up to the summit, as Ian Stannard, senior currency strategist at BNP Paribas SA, said that "the increasing likelihood that we might not get anything significant out of the G-20 is going to weigh on equity markets and the Pound too. Sterling could well be the underperformer of the week."
The Pound found support on dips towards 1.0700 versus the Euro, with a minor recovery towards 1.0800 overnight. Sterling also proved more resilient against the Dollar, after initial losses with a rally to $1.4260, from lows near $1.4110, amid a mixed day of UK economic data.
According to a report from the Confederation of British Industry, U.K financial services companies could cut as much as 1.4% of the industry's workforce in the second quarter, as business confidence declines. The remaining UK economic data was mixed, as mortgage approvals actually rose to the highest level since May 2008, with a monthly increase to 38,000.
The report from the Bank of England showed that the number of UK loans approved far exceeded initial expectations and raised speculation that the slump in the housing sector may be reaching the bottom. A separate report from Hometrack Ltd showed that house prices fell at the slowest pace in 10-months, as the average cost of a home in Britain declined just 0.6% from February to £156,100.
The steepest economic contraction since 1980 has sapped demand for housing, amid rising unemployment and tighter lending conditions, after prices tripled in the decade ending 2007. Analysts some of the biggest financial institutions in the world have said this month that the property market may now be showing some signs of recovery, as government aid to bolster lending takes effect.
In addition, UK consumer confidence increased to the highest level since May, after the Bank of England slashed interest rates to a record low of 0.5%. The Gfk index of sentiment rose five points to a reading of minus 30 in March and the report increases some level of optimism in the UK economy, suggesting that lower rates are restoring confidence.
Elsewhere, the Pound stood relatively unchanged after reports that consumer lending and credit data remained weak, as consumers maintained a very cautious approach to borrowing and major banks also retained a restrictive policy towards lending. Government bonds also advanced, after the Bank of England bought £2.5 billion of gilts yesterday, as part of its quantitative easing policy to reduce borrowing costs.
EUR/USD
The diminishing appetite for risk pushed the Euro lower against the Dollar on Monday, falling to an intraday low of $1.3115, before a corrective recovery towards $1.3190, as significant technical support levels held steady. The single currency has continued to improve against the Dollar this morning, amid a revival in global stocks, but gains will be limited with markets on alert over ECB comments on Thursday.
In terms of economic data, the Euro was undermined following reports that European consumer confidence fell to the lowest level on record in March. The G-20 meeting in London this week will see finance ministers discuss the best way to fight the global recession, which has prompted job cuts across the Euro-zone.
An index of business and consumer sentiment in the Euro-region declined to a reading of 64.65, the lowest indicator since the series began in 1985, from 65.3 in February. Gauges for industry, services and consumer sentiment all reached record lows. While a separate report showed that Spanish consumer prices fell from a year earlier for the first time in history, indicating that deflationary pressures may spread.
The global financial crisis has pushed the Euro-zone economy into the worst recession since the Second World War, forcing companies to reduce output and shed their workforce. The European Central Bank are expected to cut interest rates by another 50 basis points on Thursday. However, the market will be watching the tone of the accompanying press conference for any clues that policy makers will engage in some method of quantitative easing policy.
Elsewhere, the Euro also came under further selling pressure, after the Purchasing Managers' Index showed that European retail sales declined for a 10th consecutive months in March, as the deterioration in the labour market hampered spending. According to a report from JP Morgan & Chase Co, the single currency may extend its decline against the Dollar this week, should the Euro break below $1.3100.
Citing the current trading patterns, a level of $1.3097 represents a 50% retracement of the Euro's rally against the Dollar, which began on March 4th. Referring to a percentage ratio that's part of the Fibonacci sequence, a subsequent support of $1.3070 would represent the point before the Euro broke into a new range, after the Federal Reserve announced on March 18th that it will undertake the purchase of treasuries.
The Pound declined against the Dollar on Friday, after UK GDP declined 1.6% in the fourth quarter
GBP/USD GBP/EUR
Following on from last week, the Pound was unable to sustain a recovery against the Dollar on Friday, dropping to a one-week low of $1.4270 in New York, after a government report showed that the UK economy sank deeper into a recession in the fourth quarter of last year.
The Pound was still firmer against the Euro, peaking close to the resistance level at 1.0810, before consolidating near 1.0750 at the close of trading on Friday, despite the report from the Office of National Statistics, which showed that UK gross domestic product fell 1.6% from the third quarter.
The UK economy's contraction in the final three months of last year was far deeper than previously anticipated, as consumer spending stalled and industrial production plunged by the most since 1980. According to Philip Shaw, chief economist at Investec Securities in London, said that the "headline figure is very disappointing...we see the economy shrinking until the middle of the year. It's very difficult to see it gaining any momentum of recovery until the third quarter at the earliest."
The Pound came under further selling pressure against the majority of the 16-most actively trading currencies, after the Bank of England's chief economist Spencer Dale said on Friday that the British economy's short-term prospects are "bleak".
Consumer spending has declined 1% and retail sales also stalled, after bank's kept lending conditions retrained, despite the most aggressive policy easing in the Bank of England's history. Policy makers, led by the governor Mervyn King, have slashed borrowing costs from 4.5% in October to a record low of 0.5%. The Bank have also begun a period of quantitative easing through the purchase of government and corporate bonds with newly created money.
Bank's are still reluctant to revive lending and spending on the highstreet and on homes has plummeted, as the worst financial crisis since the Great Depression wiped out £1.9 trillion off consumers' wealth. The Pound fell 0.6% against the Dollar after the release of the data, which confirmed that the UK economy is in the midst of the worst economic contraction since 1980, when Margaret Thatcher was Prime Minister.
The UK economy shrank 2% in the fourth quarter, compared to the preliminary estimates of 1.9%, as the drop in construction was more than four times as much as initial forecasts. In addition, government spending rose less than expected at 1.3% and retail sales posted the smallest annual gain in over 13-years last month.
The 1.9% drop in sales was exacerbated with the alarming increase in unemployment, as the jobless rate rose at the fastest pace since 1971 in February. Companies were forced to slash jobs in an attempt to reduce costs, while HSBC Holdings Plc, Europe's biggest bank by market value, said last week that about 1,200 UK employees may lose their jobs.
The Prime Minister Gordon Brown, who has seen his popularity fade in the face of rising unemployment, said agreements that the government signed with the Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc require the banks to boost lending to help the economy recover.
Over the past week, Brown has embarked on a five-day diplomatic tour to try and raise interest in a combined attempt to boost global growth. He told journalists on Friday that "bank's are now under an obligation to lend £50 billion. So the position that we were last year where the naming system had frozen, we are now seeing the results."
Brown also quelled suggestions that he was planning a big new fiscal stimulus package, saying that measures in the UK's annual budget next month will be "cautious" and "targeted". The tone of the statement mirrored recent comments from the Chancellor of the Exchequer Alistair Darling, who said that the Treasury must keep its deficit under control, after the government bond auction failed for the first time since 2002.
The Pound also declined on Friday, after a separate report showed that the UK current account deficit was wider than previously anticipated in the fourth quarter. A current account gap represent money the UK has to borrow overseas to pay for the goods and service that it import. The shortfall narrowed to £7.6 billion, from a revised 8.2 billion in the previous quarter.
The downside momentum surrounding the Pound may continue this week, according to Marcus Hettinger, head of currency research at Credit Suisse Group AG. The Pound may drop towards 1.0520 against the Euro before the ECB interest rate announcement on Thursday. The UK currency also dropped 2.4% in value against the U.S Dollar and may trade between $1.3500 and $1.4000 over the next three months, as equity markets struggle to hold on to their gains.
UK stocks retreated on Friday, trimming the FTSE 100 Index's third straight weekly advance, despite reports that Barclays Plc jumped 24%, after Britain's third biggest bank said that it passed tests conducted by the UK's financial regulator and may not need to raise additional capital.
EUR/USD
The Euro was unable to break above $1.3600 against the Dollar on Friday, weakening steadily through the course of the day. The single currency was undermined by comments from the German Finance Minister Steinbrueck, who said that the Euro would be put in jeopardy if there was fiscal irresponsibility.
The single currency was also unsettled by renewed speculation that the European Central Bank would follow the Federal Reserve and the Bank of England in engaging in some form of quantitative easing policy. European stocks also fell, ending a six day rally, as the degree of pessimism sweeping through the global economy reduced investors' appetite for risk.
Reports in Germany showed that inflation slowed more than initial forecasts in March and to the weakest level in almost 10-years. Energy costs slumped and the steepest recession since the Second World War has curbed price pressures, threatening a period of deflation if consumer prices drop towards zero.
The inflation rate, calculated using the harmonised method of consumer prices, fell 0.4% from 1% in February, the lowest reading since June 1999. A 50% drop in crude oil prices over the past year has pushed the inflation down, just as companies are shedding jobs and business investment to cope with the economy slump.
The focus this week will inevitably fall on the ECB interest rate announcement on Thursday, and given the tone of recent rhetoric from a number of governing council members, the market is positioned for another 50 basis point reduction. That would leave the benchmark interest rate at a fresh historic low of just 1.0%.
The accompanying press conference will also be key in determining the short-term outlook for the Euro, amid growing speculation that the ECB will have little option but to engage in some form of quantitative easing policy. Any suggestions of move in this direction will undermine the Euro, which was already under pressure against the Dollar going into the weekend.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Failure to sell government gilts hits Sterling confidence
Euro trading 4c off record high
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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 continued to decline against the Dollar, after UK retail sales plunge four times as much as expected
GBP/USD GBP/EUR
The Pound attempted a limited recovery in early trading yesterday, with suspicions that selling from the previous day had been over-exaggerated, following the poorly-received gilt auction on Wednesday. However, the UK currency extended its losses against the Dollar yesterday, after a government report showed that retail sales plunged in February by more than four times faster than anticipated.
The report from the Office of National Statistics showed that sales dipped 1.9% from the previous month, the single biggest monthly decline since June, as unemployment rose and the recession deepened. Economists had predicted a 0.4% decline and sales increased just 0.4% from a year earlier, the smallest since September 1995.
The Chief Executive of Next Plc Simon Wolfson said yesterday that current trading conditions are "tough", after the UK's second biggest retailer reported a 15% drop in full-year profit. The deteriorating labour market conditions are expected to exacerbate the decline in consumer spending, while the bank's refusal to revive lending conditions will continue to weigh on sales.
Earlier reports this week showed that UK inflation unexpectedly accelerated to 3.2% in February, driven by the cost of imports, and the Pound subsequently rallied, amid speculation that the increase in consumer prices will limit the risk of deflation.
Nevertheless, the Governor of the Bank of England Mervyn King said in an open letter to the government that the inflation rate will resume its drop from a high of 5.2% in September. The Bank has forecasted that the rate will slip towards 0.3% by early 2011, significantly below the bank's 2.0% target.
King said this week that the UK economy fell deeper into a recession at the start of year, after the biggest contraction since 1980. The Central Bank has embarked on an asset insurance program to spend up to £150 billion to buy UK government debt, corporate bonds and other toxic assets with newly created money.
The Pound fell 0.4% against the Dollar in London, amid a combination of poor economic data and a third consecutive fall in the UK stock market. Sterling has continued that momentum this morning, falling to a low of $1.4320, as the data and downside moves in the stock market encourages investors to seek the security of dollar denominated assets.
The UK currency also slumped against the Euro, following the retail data, after earlier rising amid optimism that the worst of the financial turmoil may be over. The Debt Management Office, which manages bond auctions on behalf of the Treasury, sold £1.1 billion of inflation-linked bonds due 2022, with bids exceeding supply by 2.72 times.
The government amid to sell a record £146.4 billion of debt this fiscal year and roughly £148 billion in 2010, as the Prime Minister attempts to wrestle the UK economy out of its worst recession in a generation. The Chancellor Alistair Darling has signaled that he may refrain from holding a second round of fiscal stimulus measures in April 22nd budget, saying that "a substantial amount of money has gone into the economy."
Gordon Brown is currently in the U.S, calling on the Group of 20 nations to raise $100 billion for a fund, aimed at providing guarantees for trade finance. The measure is designed to make up for the lack of bank lending, with world trade expected to decline at its fastest pace in 80-years.
The Pound may continue to struggle against the majors today but a narrow current account deficit should provide some relief. The UK currency may be unsettled by policy uncertainty, with particular concerns over the budget outlook as debt continues to expand at a rapid pace.
EUR/USD
The Euro pushed back above $1.3600 versus the Dollar yesterday, but the single currency was unable to sustain a move towards the resistance at $1.3650, as European stocks swung between gains and losses. The U.S economic data was close to initial estimates and failed to have any major effect of the exchange rate.
The latest estimates of U.S gross domestic product in the fourth quarter showed that the economy contracted at a rate of 6.3% in the three months to December, the worst performance since 1982. The reports indicates the depths of the recession, while a separate report from the Labour Department showed that the number of people claiming jobless benefits this month climbed to a record 5.56 million.
Data Released 27th March
U.K 09:30 Current Account (Q4)
U.K 09:30 Final Gross Domestic Product (Q4)
EU 10:00 Industrial Orders (January)
U.S 12:30 Personal Income / Consumption (February)
The Pound declines against the majors, amid a combination of economic data and stock market losses
GBP/USD GBP/EUR
The Pound was on the defensive against the majors yesterday, amid a combination of economic and market fears, with lows around 1.0670 versus the Euro. While the UK currency also recorded net losses to around $1.4550 against the Dollar after the FTSE 100 Index dropped, as HSBC Holdings Plc said that will cut about 1,200 jobs in the UK, adding to signs that the recession is deepening.
The deteriorating labour market conditions has been a source of concern for the government, after Europe's largest bank by market value, said that it will eliminate the jobs over the next 12-months in processing and operations, while some administration sites may be closed altogether.
The Pound also retreated from close to the highest level since December against the Japanese Yen, as a degree of risk aversion crept back into the market and encouraged investors to seek the security of safe haven currencies. The FTSE 100 Index of equities fell for a second day and the cost of protecting European corporate bonds from default rose.
The Pound declined up to 0.7% versus the U.S Dollar and extended losses against the Euro, after a report from the Confederation of British Industry showed that UK retail sales dropped in March. The survey showed a net 44% lower sales this month, as lending conditions remained restrained.
The UK CBI retail sales survey was weaker than anticipated and the report will provide an insight into the monthly retail sales data this morning and the data has been consistently stronger than expected over the past month.
The Bank of England have embarked on the post aggressive policy easing in its history, in an attempt to get banks lending again, lowering the benchmark lending rate to just 0.5%, from 5% in October. The Treasury has also granted the Central Bank the unprecedented power to create money and pump it into the economy through the purchase of government and corporate bonds.
Policy makers have been given the mandate to spend up to £150 billion, as part of it's asset insurance program, in a bid to boost spending and end the worst recession in a generation. The governor of the BoE Mervyn King told lawmakers in Parliament yesterday that the "very weak" UK economy will continue to contract this quarter.
The Bank of England stepped up quantitative easing yesterday and bought £85.5 billion of corporate bonds in its first purchase of the debt. The Central Bank said in a statement that it had offered to buy as much as £124 million of debt and plans to hold another tender today for a maximum £128 million in company bonds.
The acquisition of company bonds follows the Bank of England's purchases of commercial paper and government debt. The Bank will spend as much as £75 billion in newly created money within the next three months to boost the ailing economy. Elsewhere, a separate report showed that the UK bond auction failed to find enough buyers for £1.75 billion of bonds for the first time since 2002.
Gilts plunged after the Debt Management Office, which manages bond auctions of behalf of the Treasury, said that investors only bid for £1.63 billion of the 40-year securities. The last time the UK government was unable to attract enough investors was in 2002 when it tried to sell 30-year inflation-protected bonds.
The Pound will be at greater risk to selling pressure today if the retail sales report is significantly weaker than expected but the UK currency may also be susceptible to downside pressures, amid increased fears that the UK will not be able to attract sufficient overseas interest for bonds.
EUR/USD
The Euro weakened to lows around $1.3420 versus the Dollar yesterday, before rising sharply towards the close of trading last night, amid comments from China over the possibility of greater use of an alternative reserve currency. The issues of reserve currencies and exchange rate management were again important influences and the U.S Treasury Secretary Timothy Geithner stated that the administration was open to the idea.
Geithner's comments initially weakened the Dollar but he retracted his remark, saying that the Dollar would remain the dominant reserve currency. The greenback will be sensitive to any further suggestion of reserve diversification, while evidence of a U.S economic improvement would lessen the risk that confidence in the Dollar would deteriorate.
The Euro initially declined against the Pound yesterday, after German business confidence fell to the lowest level in over 26-years in March. The report adds to signs that the recession is worsening and has heaped further pressure on the ECB to implement less conventional monetary tools. The Ifo Institute in Munich said its business climate index dropped to a reading of 82.1 from 82.6 in February, the worst reading since November 1982.
The global slump in overseas demand has forced German companies to scale back production and cut jobs, pushing the economy into the worst recession since the Second World War. The European Central Bank has signaled that it will cut interest rates again in April, but a number of policy makers have expressed reluctance to follow the Federal Reserve and Bank of England in engaging in quantitative easing measures.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
"Queasing" puts Sterling ahead of the game
News on the G20
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 a one-high versus the Dollar, after UK inflation unexpectedly increased in February
The Pound rallied to the highest level in over a month versus the U.S Dollar yesterday, as gilts plunged, following reports that UK inflation unexpectedly accelerated in February. According to the report from the Office of National Statistics, the annual pace of inflation rose in February, as consumer prices climbed 3.2%, amid higher food costs.
The weakness in Sterling also sustained pricing pressures, even as the economy drifted deeper into a recession. The surprising increase in the headline number was far higher than the 2.6% anticipated and the Bank of England Governor Mervyn King wrote in a letter to the Treasury that a “sharp decline” in the rate is likely to resume.
In a statement yesterday, King also said that a decline in the Pound “was very likely” and that “I see no reason why it should go any lower”. He also said that the Bank’s job is to respond and ensure the currency doesn’t keep inflation above the target, indicating that he is prepared to intervene accordingly.
The Chancellor Alistair Darling has been publicly supportive of King’s approach to medium term inflation expectations. Investors say consumer prices will be volatile given the drop in value of the Pound over the past year.
In addition, the monthly increase in consumer prices will temporarily ward off speculation that the UK economy is headed towards a period of deflation. The annual rate of inflation increased for the first time in five months, as prices for food and non-alcoholic drinks increased, boosted by gains in the cost of vegetables, after poor crops in Spain.
The data also reflected the effects of the exchange rate that pushed up the cost of imports. Ford Motor Co confirmed that the Pound’s “continued weakness” has forced the struggling automaker to increase the price of all its models in the U.K by an average of 3.75%, starting next month.
A separate gauge of the report showed that the retail price index, a measure of the cost of living used in pay bargaining, was unchanged from a year earlier, the weakest reading since March 1960.
The Bank of England has cut interest rates 4.5 percentage points since October, in the most aggressive policy easing in its history. The Central Bank announced last month that it has started printing money to fight the recession, while King told lawmakers yesterday that the outlook for consumer prices will determine how long that policy will last.
In addition, the BoE governor also said that the government should tread carefully on how much money it should pour into the UK economy and keep spending under control. Alistair Darling has said that he is considering further fiscal stimulus measures to bolster the economy in his annual budget statement on April 22nd.
In the pre-budget report last November, the Chancellor ordered £20 billion in tax cuts and spending increases, forecasting a deficit of 8% of gross domestic product. King has warned the government that it should not boost fiscal policy much further, given the significant increase in debt. The warning will tend to undermine support for the Pound, given that fiscal fears are already an important fact in undermining sentiment.
The Pound touched a high of $1.4779 versus the Dollar following the report, rising 1.4% by the close of trading last night, while the UK currency also peaked above 1.0800 against the Euro . The Pound also surged to the strongest level since December versus the Japanese Yen, as stocks in Europe and Asia gained, reducing the allure of safe haven currencies.
The U.S Treasury Secretary Timothy Geithner unveiled proposals to finance as much as $1 trillion in toxic assets. Stocks subsequently rallied as the move sparked a revival in risk appetite, while the drop in gilts pushed the 10-year yield up by the most in six weeks.
According to a report from CMC Markets Plc, the Pound may extend its rally to the highest level in six weeks versus the Dollar. The UK currency climbed above $1.44 last week and breached the 100-day moving average of $1.4700 yesterday, setting up to break through the next resistance level at $1.4880.
The renewed confidence in equity markets could see the Pound breach the $1.5000 barrier in the short-term, as the Dollar continues to depreciate, following the Federal Reserve’s decision to begin a period of quantitative easing.
In addition, a separate report from BNP Paribas SA has encouraged investors to buy the Pound, amid speculation that the government’s decision to pump money into the financial system will boost banking shares. The Bank of England confirmed yesterday that it purchased £7 billion of gilts in the week through March 19th with newly created money.
EUR/USD
The Euro was unable to sustain its upside momentum above the key resistance level at $1.3700 against the Dollar yesterday, amid a mixed tone of economic data and comments from ECB governing council members. Europe's manufacturing and service industries contracted for a 10th straight month in March, as job cuts accelerated and companies reduced output.
The Purchasing Managers' Index of both industries was at a reading of 37.6, compared with a record low of 36.2 in February. The measures of employment and output prices both fell towards record lows. Recent economic reports indicate that the Euro-zone economy is entrenched in the worst recession since the Second World War, as the global financial crisis curtails domestic and global demand.
Industrial production in the 16-nations sharing the Euro dropped by the most on record in January, while the unemployment increased to the highest level in over two years. The extent of the contraction in the Euro-zone economy has forced ECB policy makers to embark on the most aggressive policy easing in its 10-year history.
The governing council have however been reluctant to follow the Federal Reserve and the Bank of England and slash interest rates towards zero. The Euro has also found support as the ECB show few signs of engaging in quantitative easing measures, through creating money and pumping into the economy.
However, the single currency lost ground against Sterling yesterday, after ECB Vice President Lucas Papademos said that the Central Bank could consider embarking on quantitative easing measures, should all other options to revive the economy fail.
On being asked if the ECB would consider engaging in such measures, Papademos said, "this is an option which could be considered, in case the more traditional means for implementing monetary policy have been utilised". He also noted that a "distinction should also be made between quantitative easing and credit easing".
Policy makers have signaled that they would collectively favour expanding the bank's existing credit-easing policy, of lending banks as much money as they require. Rather than following the Federal Reserve and Banking of England in printing money to buy government or corporate debt.
The Pound rose to a one-high against the Dollar, amid an improved appetite for risk sentiment
GBP/USD GBP/EUR
The Pound rallied to a one-month high versus the Dollar yesterday, as the UK currency continued to gain support from the overall improvement in risk appetite, with improved sentiment towards the banking sector also a key supportive factor.
The Pound peaked at $1.4650 versus its U.S counterpart, after UK stocks rallied for the third day in succession, led by banks, amid renewed optimism that the Federal Reserve's plan to expand the financial rescue package will revive lending conditions.
The President of the United States Barack Obama and his administration are scheduled to announce the details of the plan to expand upon the $700 billion rescue package today. The U.S Treasury Secretary Timothy Geithner is set to unveil the plan that will partly rely upon private investors to buy 'bad' debt and refinance bank's balance sheets.
Lloyds Banking Group Plc rallied 11% in London and Royal Banking of Scotland Group Plc rose 4.2%, as the U.S Treasury announced a plan aimed at injecting as much as $1 trillion in purchases of toxic assets. Barclays Bank Plc also surged 16% on the session, amid speculation that Hellman & Friedman LLC will bid for its ishares unit, along with a group of private equity firms.
The FTSE 100 Index rose a further 2.9% and the revival in risk appetite with continue to be supportive to Sterling in the near-term, as the UK currency also advanced against the Euro, rising to a high of 1.0776 over night.
However, Lauren Rosborough, a currency strategist at Westpac Banking Corp, said yesterday that "the market is somewhat short sterling and Britain's currency may resume its decline against the Dollar in the medium term as the global economy deteriorates."
The Pound declined heavily against all of the 16-most actively traded currencies, after the Bank of England announced last month that it will begin printing money and pumping it into the economy through a policy known as quantitative easing. UK bonds fell yesterday but further declines may be limited, as the BoE steps up the purchase of gilts in an attempt to revive the economy.
The Central Bank is expected to buy £2.5 billion of gilts today, after it bought £5 billion of bonds last week. The Pound stood firm yesterday and continued the upside momentum against the Dollar, despite comments from the outgoing Bank of England policy maker David Blanchflower.
Blanchflower, who voted for a rate cut at every meeting since October, reiterated his call for a government stimulus package to revive the UK economy, citing the risks that the number of people out of work and receiving jobless benefits will exceed 3 million later this year, as the recession deepens.
A recent report from the Office of National Statistics showed that UK unemployment rose by the most since records began in 1971 last month, as the UK economy sank into the worst contraction since 1980. The Prime Minister Gordon Brown has pumped hundreds of billion of Pounds in the financial sector, in a vain attempt the halt the decline, while policy makers have slashed borrowings costs to lowest level on record.
In a statement to Parliament, Blanchflower said that "forecasters in a recession tend to be overly optimistic" and "the worry is that any forecast we do have of unemployment or output, the likelihood in a recession is that we've undercooked".
His comments yesterday are in stark contrast to a statement released by the Confederation of British Industry, who said that the government should avoid a further budget giveaway because the public finances are in an "alarming state".
The focus today will fall on the tone of the comments from the Bank of England governor Mervyn King, for further evidence on the economic trends and a pessimistic tone would risk renewed selling pressure on the Pound. In terms of economic data, a weak report this morning on UK consumer prices could also increase concerns over deflation. The retail price index is likely to dip to significantly below zero but the Pound will gain support is global stock markets continue to gain.
EUR/USD
The Euro is fast-becoming the currency of choice for investors, after the Fed's actions last week devalued the Dollar and caused a revival in risk appetite. The European Central Bank President Jean-Claude Trichet has been widely criticised for failing to keep up with efforts to stem the recession.
However, the ECB's reluctance to use less conventional tools to revive the economy, while the Federal Reserve and the Bank of England undertake quantitative easing measures, means that traders are now glad that the Central Bank are behind the curve and have bought the Euro as an element of risk appetite returns.
Trichet suggested that there was further scope to cut interest rates next month, but also expressed doubts over the potential to cut rates to zero. In the statement yesterday, he also indicated that there will be resistance to utilise any further non-conventional measures.
The single currency has strengthened 7.7% in value against the Dollar this month, after tumbling 9.3% in the first two months of the year. JP Morgan & Chase Co, Morgan Stanley and Citigroup Inc are all advising investors to step up their purchase of Euros.
Investors are ignoring reports from the European Union that the economy will contract 3.3% this year, and are snapping up currencies where Central Bankers are resisting calls to purchase government or corporate debt, as a way of lowering interest rates and pump money into their financial systems. These options are becoming increasingly scarce after the Federal Reserve joined the Bank of England, Bank of Japan and Swiss National Bank in quantitative easing.
John Normand, Head of currency strategy at JP Morgan in London, said that the Euro will probably rise 2.8% against the Dollar to $1.4000 in a month, after soaring 5.1% in value over the past week. "the top on Euro-Dollar will come when the ECB looks likely to join the quantitative easing crowd".
The Dollar found little support against the majors yesterday, as a rebound in global stocks diminished the allure of safe haven currencies. The U.S currency also failed to make gains, despite reports that existing home sales unexpectedly climbed in February, as a record number of foreclosures encouraged buyers into the market to take advantage of lower prices.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Euro still strong with no plans for quantitative easing
Sterling makes large gains on the 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 records the biggest weekly gain against the Dollar in seven weeks, as the Fed begin quantitative easing
GBP/USD GBP/EUR
Following on from last week, the Pound recorded its biggest weekly advance against the Dollar in seven weeks, after the U.S Federal Reserve announced that it would undertake quantitative easing measures and start printing money to buy Treasuries.
The Fed's decision to utilise less conventional techniques to revive the economy is undermining Dollar sentiment, while the Bank of England also confirmed that it would purchase corporate debt to bolster financial markets.
The introduction of quantitative easing measures through excessive money supply threatens to de-value the Dollar, as the greenback suck towards $1.3700 versus the Euro and $1.4500 against the Pound, the weakest level since January 29th.
The Dollar crumbled against the majors last night in the aftermath of the FOMC statement, as the Fed announced that it will start buying Treasuries and increase its purchase of mortgage debt. Federal Reserve policy makers said that they will buy as much as $300 billion of U.S government bonds and step up the purchase of mortgage-backed securities, expanding the Bank's balance sheet by up to $1.15 trillion.
According to currency strategists at Citigroup Inc, "the implications of the Fed decision are unambiguous, the Dollar should weaken". The U.S currency may continue the downside momentum in the near-term and has lost over 3% in value versus the Pound, as investors are encouraged to sell out of Dollar denominated assets.
The Pound held close to the highest level in a month against the Dollar on Friday, after the newly appointed member of the Bank of England's monetary policy committee, Spencer Dale, said that the UK economy will begin growing in the second half of the year.
According to the minutes from the Bank's last policy-setting meeting, UK policy makers voted unanimously to start printing £75 billion to pump into the financial sector and fight the recession. The nine-strong committee also cut the benchmark interest rate to an historic low of 0.5%. The Chancellor of the Exchequer Alistair Darling gave the Central Bank the go ahead to buy up to £150 billion to cleanse UK banks of toxic assets.
According to a report from BNP Paribas SA, the Pound will also be supported by a rally in banking shares, as the measures announced last week have a global effect and increase confidence. "We view the quantitative easing introduced in the UK and then adopted in Switzerland and the U.S as Pound bullish".
UK stocks gained on Friday, extending the FTSE 100 Index's second consecutive weekly advance, led by an increase in banking stocks. The index increased 2.4% on the week, after the Federal Reserve's announcement and investors are speculating on whether we are entering a "bottoming process for equities."
The Pound stood firm and managed to cling to recent gains made against the majors, despite reports that UK house prices face a decline of 40% in nominal terms, as the most aggressive policy easing in history fails to revive lending conditions.
According to the report from Sanford C. Bernstein, prices have already slipped 20% in the past year but property crashes in the past were largely masked by the effects of inflation. "The key difference this time is that more of the drop in the income ratio actually hits nominal prices" since inflation is now lower.
UK housing sales have slumped to the lowest level since records began in 1978, as the deepening recession pushed down prices. The report from the Chartered Institution of Chartered Surveyors also showed that the UK economy suffered the worst contraction since 1980, in the final three months of 2008.
Elsewhere, the Prime Minister Gordon Brown has come under further pressure as unemployment rise to the highest level in a decade. An independent report from the National Audit Office increase his woes, as it said that the government allowed Northern Rock Plc to keep writing risky loans, even after the lender sought emergency funding from the Treasury.
The auditor also found that the Treasury failed to adequately examine the bank's books before they took it over in February last year, allowing the lender to pursue a flawed business plan that resulted in a £1.4 billion loss.
The focus this week will fall on whether the Pound can sustain last week's gain, while comments from the Bank of England governor Mervyn King will be watched closely for further evidence on the economic trends and bank policies.
A pessimistic tone will risk renewed selling pressure on the Pound and a number of key economic indicators are due for the release. The CPI index will probably reveal that the annual pace of inflation moderated in February, while UK retail sales probably fell a further 0.4% on the month, amid tighter lending conditions and fears over job security.
EUR/USD
The Euro again met resistance above the $1.3700 level versus the Dollar, and remained largely resilient against a resurgent Pound, as ECB policy makers resist giving any indication of implementing less conventional techniques to revive the economy.
ECB governing council member Nout Wellink said that the Central Bank may cut interest rates again in March, as consumer prices continue to fall and encourage spending. The ECB have lowered interest rates by 2.75 percentage points since October, to a record low of 1.5%, in a seemingly vain attempt to halt the worst recession since the Second World War.
The Bank of England, the Federal Reserve and the Bank of Japan have all gone further, cutting their benchmark interest rates to close to zero and have confirmed that they will buy government bonds to stimulate their economies.
Wellink confirmed that "at this moment we don't foresee that process" and the ECB's reluctance to undertake such measures will be supportive to the Euro in the near term. Inflation was at 1.2% in February, close to the lowest level since 1999. The Central Bank aims to keep the rate jut below 2.0% but has forecasted that prices will plunge to 0.4% this year, threatening a period of deflation, as the economy contracts 2.7%.
In addition, ECB member and Bundesbank President Axel Weber said that the Bank will lower interest rates again and may extend the maturities of its loans to banks, pushing down long-term borrowing costs.
In a speech in Berlin, Weber confirmed that the ECB still has "room to maneuver" and suggested that he favours expanding the Central Bank's existing policy of lending, rather than following the U.S Federal Reserve and Bank of England in buying government or corporate debt.
In terms of economic data, the Euro stood firm despite reports that European industrial production shrank by the most on record in January, as the steepest global recession in over sixty years forced companies to cut output and curb investments.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Over 2 million out of work in the UK, the highest number for 12 years.
US Central Bank announce that they will be buying up long-term government securities over the next six months.
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 to the highest level against the Dollar since January, rising to a high of $1.4588
GBP/USD GBP/EUR
The Pound again took advantage of broad Dollar weakness yesterday, rising to a high of $1.4588 by the close of trading last night, to record the biggest intraday move of the year so far. The UK currency also resisted any move lower against the Euro, as UK stocks rebounded after the U.S Federal Reserve said that it will buy $300 billion of government bonds and mortgage-backed securities.
The Fed's decision to utilise less conventional techniques to revive the economy is undermining Dollar sentiment, while the Bank of England also confirmed that it would purchase corporate debt to bolster financial markets. The FTSE 100 Index gained 0.3% in London, as Barclays Plc surged 17%, as a measure of banking stocks rose to the highest level in three weeks.
An index of UK bank shares jumped 5.9% after the Fed announced that it plans to buy Treasury securities and step up the purchases of mortgage bonds, expanding its balance sheet by as much as $1.15 trillion. The Pound made substantial gains against the Dollar and may strengthen further, after breaking through the significant resistance level at $1.4500.
That level represents so-called resistance on a descending trend line connecting the January high of $1.5373, and the February peak of $1.4986, according to a mathematical equation, known as the Fibonacci sequence of numbers. A point of resistance refers to a specific level where sell orders may be clustered and a break through this level would then signal a move towards the next point of resistance.
In terms of economic data, the UK budget deficit swelled to £9 billion in February, the largest for the month, since records began in 1993. The deepening recession has slashed tax receipts, while the highest unemployment rate in over a decade increased government spending.
The shortfall in the budget compares with just £1.1 billion a year earlier, according to a report from the Office of National Statistics, and the extent of the decline was significantly more than initial estimates of £8.2 billion. The deficit in the first 11-months of the fiscal year more than tripled to a record £75.2 billion, from £23 billion in the previous 12-months.
The deepening economic slump is adding to government debt that is already at the highest level since the late 1970s. The ongoing deterioration in the UK property market is exacerbating the recession, while companies lose profits and cut jobs as the cost of supporting banks escalates. The Chancellor of the Exchequer Alistair Darling also signaled yesterday that outlook for public finances is worse than he previously forecasted four months ago.
Separately, a report from the Institute for Fiscal Studies said that the shortfall to date puts the government on course to borrow £95 billion for the full fiscal year, 17.4 billion more than Darling predicted in November's pre-budget report.
Elsewhere, UK mortgage lending fell to the lowest level in eight years last month, as the escalating financial crisis prompted banks and lenders to retain funds. The report from the Council of Mortgage Lenders showed that the gross value of loans fell to 9.9 billion, from 11.7 billion in January. This figure is the lowest since February 2001, down 60% from 2008, despite the most aggressive policy easing in history and numerous injections of capital from the government.
Earlier this week, a report from Rightmove Plc showed that the average asking price for a home dropped 9% in March, from a year earlier, as buyers struggled to obtain mortgage finance. The Labour government has taken control of four banks since the start of the crisis and has stepped up efforts to revive lending conditions, as the UK economy succumbs to its worst contraction since at least 1980.
However, UK residential mortgage-backed bond markets may stay shut for the rest of the year and there are now fewer active lenders in the market. Michael Coogan, director general of the CML, said in a statement, "until funding improves, the capacity of lenders to lend will remain constrained."
Nevertheless, the Pound will retain some near support against the Dollar, after the Fed's decision to undertake quantitative easing policy through the purchase of government bonds provides some renewed optimism to equity markets. The UK currency remains under pressure versus the Euro, but a shift in trend may be imminent if the ECB announces that it will adopt a similar stance.
EUR/USD
In the meantime, the single currency may extend its rally against the Dollar, after rising to an 11-week high of $1.3726 yesterday, blistering through a number of key resistance levels, to indicate a move towards $1.4000 may be forthcoming. The European Central Bank has thus far been reluctant to lower interest rates below 1%, let alone announce quantitative easing measures and match the Federal Reserve in buying government debt.
The Euro yesterday rose by the most against the Dollar in nine years, while European stocks advanced to a one-month high, after the Fed said it will purchase $300 billion in long-term treasuries. The single currency is likely to fall back towards $1.2000 versus the Dollar, once the ECB is forced to follow the Fed's initiative, according to a report from UBS AG.
Mansoor Mohi-Uddin, managing director of currency strategy in Zurich at UBS said, "Expect the Euro to keep overshooting for now with the Euro-Dollar back toward $1.40. The return of investor risk aversion and all the major central banks embracing quantitative easing will cause safe haven flows to resume and push the U.S Dollar higher back toward its long-term fair value of $1.20 this year."
The ECB President Jean-Claude Trichet said yesterday that the Central Bank is "studying at the moment whether to take complementary measures that won't necessarily be the same as other central banks". Policy makers within the ECB's governing council have reduced interest rates to 1.5% this month, compared with 0.5% in the UK and as low as zero in the U.S.
In terms of economic data, the Dollar was also undermined by weak economic data as the Philly Fed index showed that manufacturing in the Philadelphia region shrank in March for the 15th time in the last 16 months. Elsewhere, an index of leading economic indicators showed that the U.S economy's future performance dropped and the number of Americans collecting jobless benefits rose to a record high.
The Dollar is poised to record it worst weekly performance against the majors for 25-years, trading at close to a two-week low versus the Euro. The U.S currency is likely to extend that run in the near-term, after the Fed's decision to increase money supply reduced the allure of Dollar denominated assets.
Data Released 20th March EU 09:00 Current Account Balance (January)
The Dollar declines against the majors, after the Fed announce quantitative easing measures
GBP/USD GBP/EUR
The Pound plunged to the lowest level in seven weeks versus the Euro and extended that decline overnight to a low of 1.0555, after a government report showed that UK unemployment increased in February at the fastest rate since records began in 1971.
The deepening recession is having a profound effect on the workforce, as factories, building sites and banks slash jobs, amid a fundamental lack of demand on a domestic and global front, and in an attempt to cut costs. Claims for jobless benefits rose almost double initial forecasts, rising 138,400 in February to 1.39 million. That's more than the population of Cambridge and compares with the increase of 84,800 that was anticipated prior to the release of figures. The damaging report from the Office of National Statistics also showed that a broader measure of unemployment climbed above 2 million in January for the first time since 1997.
The deteriorating labour market conditions is another devastating blow to the government and the Prime Minister Gordon Brown, who must hold a general election in 15 months, said that the figures were a matter of "personal regret".
Unemployment is currently at the highest level since the Labour Party came to power 12-years ago and Brown is under mounting pressure to apologise for not doing enough to prevent the crisis. The government faces the prospect of fighting the next election with one in 10 people of employment age out of work and claiming benefits.
The government has poured hundreds of billions of Pounds into the financial sector but the rescue packages have seemingly failed to prevent the economy from drifting deeper into a recession. Companies from the motor industry to banking are eliminating workers and Britons will come under additional pressure as unemployment rises. The financial crisis has so far wiped out £2 trillion from household wealth.
A senior economist at UBS AG in London, Amit Kara, who previously worked for the Bank of England, said that the figures yesterday would mean that the government loses 140,000 voters and "the picture is very grim. We're looking at a peak of 3.5 million next year."
The unemployment rate has risen to 6.5%, compared with 8.2% in the U.S and 8.2% in the Euro-zone. The jobless rate peaked at 3.3 million in May 1984, when Britain was in the grip of social unrest as the Prime Minister at the time, Margaret Thatcher, tried to stamp out a miner's strike.
The Pound fell to a low of $1.3845 against the Dollar following the release of the data and the UK currency came under further selling pressure against a resurgent Euro, following the release of the minutes from the Bank of England's last policy-setting meeting.
The Monetary Policy Committee, led by the governor Mervyn King, voted unanimously to purchase as much as £75 billion in government bonds and toxic debt. Policy makers lowered the UK benchmark lending rate to a fresh historic low of 0.5%, but the most aggressive policy easing in British history has failed to revive confidence in the banking sector, leading to a period of quantitative easing.
Elsewhere, the International Monetary Fund expects the UK economy to contract by 0.2% in 2010, on top of a 3.8% decline this year. The Pound extended its decline against the Euro, amid reports that the IMF expects the recession to last well into next year.
EUR/USD
The Dollar declined to the weakest level in over a month versus the Euro yesterday, while the U.S currency also suffered a surprisingly aggressive downside move against the Pound, following the FOMC rate announcement last night.
Initially, the Dollar came under further pressure against the Euro, consolidating above the key $1.3000 level, amid speculation that the Federal Reserve would consider less conventional methods to boost the economy. The introduction of quantitative easing measures through excessive money supply threatens to de-value the Dollar, as the greenback fell to a low of $1.3157, the weakest level since January 29th.
The Dollar crumbled against the majors last night in the aftermath of the announcement, as the Fed announced that it will start buying Treasuries and increase its purchase of mortgage debt. Federal Reserve policy makers said that they will buy as much as $300 billion of U.S government bonds and step the purchase of mortgage-backed securities, expanding the Bank's balance sheet by up to $1.15 trillion.
According to currency strategists at Citigroup Inc, "the implications of the Fed decision are unambiguous, the Dollar should weaken". Indeed the greenback has sunk towards $1.3500 versus the Euro this morning and lost over 3% in value versus the Pound, as investors are encouraged to sell out of Dollar denominated assets.
The Pound retreats against the majors after UK stocks decline for the first time in three days
GBP/USD GBP/EUR
The Pound's upside momentum against the Euro ran out of steam yesterday, as the UK currency declined for the first time in three days, to a low of 1.0718 last night, after global stocks markets fell and encouraged investors to seek the security of the "safest" assets.
In addition, the Pound also lost ground against the Dollar, falling below the psychological level at $1.4000, and was confined to narrow trading ranges with support coming at $1.3900. The FTSE 100 Index lost 1.6% in value yesterday, while equity markets across Europe dropped, as investors deemed the 10% rally in stocks since the 2009 lows as "overdone".
UK stocks ended three days of advances but the benchmark rallied again yesterday, extending last week's biggest five day gain in two months, after Bank of America Corp joined JP Morgan & Chase & Co and Citigroup Inc in saying that it was profitable during the first quarter of 2009.
The strong correlation with stock market movement and the performance of the Pound is becoming increasingly prevalent. The UK currency is now considered one of the most risk-sensitive currencies, along with the U.S Dollar and Japanese Yen.
The Pound also came under renewed selling pressure after another report on the UK property market showed that house prices dropped in January for a seventh consecutive month. The DCLG survey confirmed that prices declined 11.5% in the year to January before reports this morning show that unemployment increased last month.
The number of people out of work and receiving jobless benefits is expected to have risen to 84,800 in February, after rising in January to the highest level since July 1999. The report from the Office of National Statistics will also show that the claimant count increased over 100,000, while the unemployment rate edged higher to 4.0%
The tone of the report from the Department for Communities and Local Government adds to recent evidence that the economic slump is worsening. The Pound may extend losses this morning ahead of a barrage of significant economic data, investors have been encouraged to use any gains to $1.42 and 1.09 against the Euro as opportunities to sell the Pound.
The Pound lost 23% in value against the Euro in 2008 and a further 26% versus the Dollar, as the UK economy drifted into the worst recession in three decades, prompting the Bank of England to cut interest rates to a record low of 0.5%.
The Bank's monetary policy committee is scheduled to release the minutes of its last policy meeting this morning. The report is expected to be Sterling negative in tone, with the emphasis on quantitative easing measures undertaken this month.
The BoE Governor Mervyn King said yesterday that the outlook for consumer prices and inflation expectations will determine when policy makers will reverse the asset insurance program of buying toxic assets, to bolster the economy and start raising interest rates again.
EUR/USD
The Euro has struggled to sustain its momentum above $1.3000 versus the Dollar but the single currency may extend gains to a near-two month high of $1.3321, based on trading patterns known as the Fibonacci sequence of numbers.
A number of technical indicators confirm that the Euro's advance above resistance levels at the five-day moving average of $1.2928 and the 21-day moving average of $1.2724, suggests that the single currency may be poised for an extended move beyond $1.3000.
The Euro has recorded its first weekly advance against the Dollar since early February and analysts are already anticipating a move towards $1.3321, which would represent a 38.2% retracement of the Euro's fall from the December 18th high of $1.4719 to the March 4th low of $1.2457.
Fibonacci technical analysis is a mathematical formula based on the theory that prices rise and fall by certain percentages after reaching a high or low. A break of one level indicates a currency may move to the next and a failure suggests a trend may stall.
In addition, the Euro may also make gains after Germany rebuffed a U.S plan to increase fiscal stimulus measures to help pull the global economy out of a recession. According to Simon Derrick, chief currency strategist at Bank of New York Mellon said,
"The fact that Euro-zone nations have been able to avoid making any fresh commitments to spend even more money should, at the margins, prove encouraging to investors in Europe and, as a result, the Euro".
In terms of economic data, the Euro also found support as German investor confidence unexpectedly rose to the highest level in almost two years in March, after the ECB cut interest rates to a record low. The ZEW Centre for Economic Research said that its index of sentiment increased to a reading of minus 3.5 from minus 5.8 in February, to record the highest reading since July 2007.
The Dollar found support yesterday after stocks declined worldwide but the U.S currency also made gains against the Pound after housing starts was notably stronger than previously estimated. While building permits also rose to trigger some optimism that the housing sector may start to bottom out.
However, the improvement in confidence was limited by renewed fears surrounding the outlook for AIG with further government support likely to be required. Elsewhere, U.S producer prices rose marginally in February, as the cost of energy increased and that is likely to be reflected in the CPI index released later today.
The Pound rises against the Dollar for a fourth straight day and to the highest level since March 6th, as global stocks continue to rally
GBP/USD GBP/EUR
The Pound to the highest level in over a week versus the Dollar yesterday, rising to a high of $1.4228 on the session, while the UK currency also advanced against the Euro. While, gilts fell following reports that Barclays Bank Plc reported a "strong start" to 2009, spurred by the acquisition on Lehman Brothers assets last year.
The subsequent revival in risk appetite continued as banking stocks reached the highest level in two weeks, after the third largest UK bank said that its businesses will continue to perform well. The Pound also found support after finance ministers from the Group of 20 most biggest developed and emerging economies pledged a "sustained effort" to end the global financial crisis and cleanse banks of toxic debt.
A spike in risk appetite will always be supportive to Sterling in the current climate because it's one of the most undervalued currencies and the Pound strengthened 1.6% versus the Dollar to the highest level since March 6th, as the UK stock market gained a further 2.5% on the session.
The sentiment towards the domestic and international financial sector as continued to improve and the Pound should also gain some relative support, given that other major economies will probably move towards quantitative easing policies, to support their respective economies.
However, the Pound was unable to sustain the gains made against the majors and weakened sharply in New York, back below $1.4100 against the Dollar, as the rally in equity markets showed signs of fatigue. In addition, the UK currency may struggle to consolidate on the recent upside move, as the economy remains in the grip of the worst recession for thirty years, which threatens to exacerbate banking losses.
Nevertheless, the Pound made gains against the Dollar for the fourth consecutive trading session, its longest winning run for over a month, amid hopes that the world's biggest financial companies will recover. Citigroup Inc, JP Morgan & Chase Co and Bank of America Corp have all said that they were profitable in the first quarter, despite numerous capital injections from the U.S Treasury.
According to a report from Rightmove Plc, the average asking price for a home in the UK dropped an annual 9% in March, as buyers struggled to obtain home loans, amid the fundamental lack of mortgage finance. One of the main priorities for the government and the G-20 is to get banks lending again and the restriction in credit is also having a significant impact on consumer spending.
Nevertheless, the UK currency has remained firm this morning, as the improvement in confidence for the financial sector is still an important influence in curbing selling pressure. The focus today will fall on comments from the Governor of the Bank of England Mervyn King, as investors look to assess his outlook towards the economy.
In addition, further comments that interest rates will not be cut any further could provide a small segment of support for Sterling. Although any positive momentum will probably be offset by fears over the deteriorating labour market conditions, with unemployment expected to rise higher in Wednesday's data.
EUR/USD
The Euro advanced against the Dollar for a fifth straight day, briefly touching a high above $1.3000, to record its longest stretch of gains in three months. The single currency benefited from a revival in risk sentiment, amid speculation that the worst of the banking crisis is over, while the Group of 20 policy makers said that they would double the International Monetary Fund's resources.
Confidence in the Euro has been undermined in recent weeks, amid concerns about the exposure to eastern European banking losses but if the IMF is going to support these countries, then that will at least postpone the risk for the time being and become supportive to the Euro.
The single currency rallied 0.6% against the Dollar, following a 2.2% gain last week, and the Euro may appreciate to $1.4000 this year, according to Ron Leven, the executive vice president and a senior currency strategist at Morgan Stanley in New York.
The G-20 finance ministers also told the IMF that it will have its resources at least doubled to $500 billion and the biggest beneficiaries from the statement will include the Euro and Swedish Krona. These currencies are often used to hedge a sovereign funding crisis in Europe, while John Normand, global head of foreign-exchange strategy in London at JP Morgan & Chase Co, said that "the risk of a funding crisis is substantially lower".
Elsewhere, in terms of economic data, European payrolls shrank by the most on record during the fourth quarter. The global financial crisis and escalating threat of a depression has forced companies to scale back production and shed jobs.
Employment in the Euro-zone contracted 0.3% from the previous three months, the second straight reduction and the biggest decline since the data series started in 1995. Payrolls and full-year growth slowed to 0.8% from 1.8% in 2007, while a separate report showed that inflation held close to the lowest level in 10-years in February.
The harmonised index of Euro-zone consumer prices showed that the core rate of inflation was slightly higher at 1.7% and this will make it slightly more difficult for the ECB to justify another aggressive cut in interest rates. In addition, governing council member Juregen Stark refused to confirm the possibility that the Central Bank will undertake new monetary tools to bolster the economy and that may provide some support to the Euro in the near-term.
The Dollar declined against the majority of the 16-most actively traded currencies yesterday, as the biggest four-day surge in U.S stocks since November has created a strong element of risk appetite, reducing demand for the security of Dollar denominated assets.
Elsewhere, the Chairman of the Federal Reserve Ben Bernanke gave a reassuring interview to reporters, where he calmed fears that the U.S is heading for its first depression since the 1930s. The major issue is confidence in the banking sector and news coming out of that sector has been encouraging with banks on both sides of the Atlantic indicating that earnings have been rising since the start of the year.
The Dollar also came under further selling pressure in New York, amid reports that U.S industrial production fell for the four consecutive month in February, led by declines in orders that point to a worsening slump in global business investment.
Data Released 17th March U.S 12:30 Housing Starts (February)
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Improvements in Sterling against the US Dollar.
The focus this week is on the release of the minutes from the last Bank of England’s Policy Meeting.
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 continued to make gains against the majors, amid a global increase in risk appetite
Following on from last week, the Pound continued to improve against the Dollar on Friday, finding support at $1.3900 before a move towards $1.4050 in U.S trading. The UK currency also rallied strongly against the Euro amid an improvement in global risk appetite, as stock markets rallied worldwide in anticipation of the G-20 meeting over the weekend.
Finance Ministers from the 20 biggest developed and emerging economies pledged a "sustained effort" to the end the global financial crisis and cleanse banks of toxic debt. The Chancellor the Exchequer Alistair Darling told reporters after the meeting that "we are seized by the fact that there was a sense of urgency".
While the U.S Treasury Secretary Timothy Geithner said that there was a "clear commitment to do what's necessary, to keep at it, to get the economy on track". The tone of the comments sparked a revival in global stocks and such commitments marked a compromise at the end of week where U.S calls for governments to increase spending were rebuffed by EU finance ministers.
The primary objective is to improve lending conditions throughout the world's major economies, as banks restrict mortgage finance after being stung by more than $1.2 trillion of writedowns and losses since the start of the crisis. Interbank lending rates rose to the highest level since January 8th after a statement from the G-20 said that "our key priority now is to address the value of assets held on banks' balance sheets, which are constraining banks' lending".
Stocks in Europe, Asia and the U.S climbed higher in the aftermath of the G-20 meeting, while the Federal Reserve Chairman Ben Bernanke said that a depression has been avoided. Barclays Plc also became the latest bank to announce that it has had a strong start to the year, as shares climbed 11% on Friday after the lender said its businesses will continue to perform well.
The overall confidence in the UK economy will remain weak for sometime but speculation over more aggressive European policies to fight deflation will continue to provide some support to Sterling in the near-term. UK stocks climbed on Friday, consolidating on the 0.5% increase from the previous session, and global stocks rallied after Japan and China signaled further stimulus measures to revive their respective economies, prompting investors to purchase higher-yielding assets.
The subsequent increase in risk appetite prompted speculation that the Pound was poised for a major breakout against the Dollar, rising above the significant resistance at $1.4000. Analysts are already anticipating a sustained move towards $1.4179 and latterly $1.4306 but Dollar buyers may wish to place a stop order at $1.3900, which will act as support should the breakout fail to gather momentum.
Investors will be looking to see if the pick-up in investor sentiment, generated by the strong improvement in equity markets as well as the quantitative easing measures undertaken by the Swiss National Bank, will be maintained this week.
While in terms of economic data, the Pound may be susceptible to the latest unemployment figures on Wednesday. If labour market conditions does not appear to be deteriorating any faster than other major economic then Sterling may continue to gain support. However, a monthly increase above 100,000 would probably undermine confidence in the Pound.
Elsewhere, the Governor of the BoE Mervyn King is scheduled to give a statement today and the week will probably be dominated by the minutes from the Central Bank's last policy setting meeting. The report should provide some further insights into quantitative easing measures, as well as the latest assessment of the economic outlook.
The Euro pushed to highs around $1.2950 versus the Dollar on Friday but struggled to sustain this momentum, amid fears over a continual deterioration in the Euro-zone economy. However, risk appetite lessened the immediate demand for Dollar denominated assets and is a theme that may continue in the near-term as investor sentiment improves.
European economic data did not have a significant impact on Friday, as retail sales rose marginally by 0.1% on the month in February. At the G-20 meeting, the UK maintained pressure for a further concerted fiscal stimulus package, in an attempt to help strengthen the global economy.
However, this was met with German and French opposition to the suggestions, which created some friction, although the disagreements were contained at this stage and risk appetite only deteriorated slightly.
It is a relatively quiet week in terms of European economic data, with the focus falling on the German ZEW index for analyst expectations. The report is expected to retain the sharp improvement seen in February, an indication that lower interest rates and fiscal stimulus measures are helping to support business confidence.
The Dollar fell by the most since the Euro since early December, amid speculation that worst of the U.S banking crisis may be over, reducing demand for the greenback as refuge from financial market turmoil. The Dollar lost 2.1% in value against its European counterpart after the Bank of America Corp Chief Executive Kenneth Lewis told reporters that the company was profitable in January and February.
JP Morgan Chase & Co and Citigroup Inc have also seen a sharp improvement, to signal that the three largest U.S banks are recovering after a dismal year. In terms of economic data, the Dollar remained on the back foot after the U.S trade deficit narrowed to $36 billion in January to the lowest reading in six years.
There was a monthly decline in both imports and exports, as economic activity continued to contract sharply and the data should have provided some underlying degree of support to the Dollar. Elsewhere, the Michigan sentiment index edged high to a reading of 56.6 in the preliminary estimates for March. While the Fed Chairman Ben Bernanke gave his first television interview on Sunday and was slightly more optimistic over the chances of an economy recovery.
Data Released 16th March
U.K 00:01 Rightmove House Prices (March)
EU 10:00 Harmonised Index of Consumer Prices (Final – March)
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Sterling has been hard hit by increased world-wide risk aversion.
Dollar benifits from reduced risk appetite in the market which has been caused by loses in stocks.
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 back against the majors overnight, amid a recovery in global stocks
The Pound continued to decline against the majors yesterday, dropping under 1.0800 versus the Euro and falling to a low of $1.3710 against the Dollar, after the Bank of England began buying UK government bonds and stock-market losses sapped demand for riskier assets priced in Sterling.
The FTSE 100 Index of UK stocks declined 1% on the day, while the Dow Jones Stoxx 600 Index of European shares slipped 1.2%. The Pound is becoming increasingly sensitive to the volatile movements in global equity markets, while the Bank of England bought £2 billion of gilts on Wednesday, by creating money as part of quantitative easing policy, and that is pushing yields down to near parity with bunds.
The Pound subsequently weakened 0.4% against the Euro and depreciated 0.9% versus the Dollar, as the downside pressures surrounding Sterling intensified after the Bank of England unveiled its plan to start buying corporate or government bonds.
The Bank's monetary policy committee have cut interest rates by 4.5 percentage points since October. However, the fundamental lack of credit and mortgage finance has forced policy makers to seek new tools to halt the recession.
Bank of England policy maker Kate Barker said yesterday that the decision to buy toxic assets with newly created money was a necessary measure to prevent the threat of deflation from taking a stranglehold on the economy. Printing money "is the best course in order to achieve our objective of keeping inflation to target in the medium term."
The recession is showing signs of worsening with house prices falling at the fastest rate since 1974 and Barker conceded that "the evidence over the last month was of more pronounced weakness in the global economy" and "the economic outlook had deteriorated further."
The BoE will spend roughly £75 billion buying government and corporate debt in an effort to revive the economy but policy makers' have predicted that UK inflation will slow to below the government's 1% floor as the threat of a depression looms largely over the economy.
The Pound improved against the Dollar towards the close of trading last night, amid an improvement in global risk appetite as stocks recovered in New York. The overall confidence in the economy will certainly remain weak for some time but speculation over more aggressive European policies to fight deflation will provide some significant support to Sterling.
UK stocks climbed, erasing earlier losses, as the FTSE rose 0.5% following reports that William Morrison Supermarkets Plc reported higher earnings and analysts upgraded shares of Standard Life Plc. In addition, global stocks rallied overnight after Japan and China signaled further stimulus measures to bolster growth, prompting investors to buy higher-yielding assets.
The Pound rallied above $1.3900 against the Dollar and the UK currency has consolidated on those gains this morning, rising through the psychological resistance level at $1.4000. Analysts are already anticipating a major breakout with sustained gains in the U.S stock market prompting investors sell out of the Dollar in favour of more riskier assets.
From a technical perspective, a break above $1.3980 should open the way towards $1.4179 and latterly 1.4306. However, if the breakout fails to gather momentum then an close back below $1.3980 could signal a further move to the downside.
The Euro declined against the Dollar following the Swiss interest rate decision, as policy makers cut borrowing costs and there will now be a strong focus on ECB monetary policy for April. There will also be additional speculation that the Central Bank will move away from the standard policy responses and begin a period of quantitative easing.
However, this speculation should be countered by reduced fears over Eastern European loans and the Euro subsequently rallied back towards $1.2920 versus the Dollar by the close of trading last night. In terms of economic data, European producer prices unexpectedly declined from a year earlier for the first time since 2004 in January. The data indicates that inflation will slow more than initially estimated, adding to the case for further action by the ECB to limit the risk of deflation.
In addition, a separate regional report showed that French companies shed the most jobs in 40-years in the fourth quarter of last year. Manufacturing has slumped by the most since comparable records began and employers prepared for the worst recession since the Second World War.
The Pound continued to decline against the majors after the UK trade deficit widened to a record level
The Pound dropped to a fresh six week low against the Euro yesterday, slipping 0.3% to a low of 1.0770, while the UK currency actually advanced against the Dollar to a high of $1.3906, despite a drop in UK stocks for the first time in four days. The FTSE 100 Index fell 0.6% on the session, having swung between gains and losses for the majority of the day, after International Power Plc said that profitability may fall on lower prices this year.
The extremely volatile market conditions are reverberating through to currency and investors are convinced that stocks will extend their 17-month decline, with increased pessimism in the U.S climbing to the highest since the Standard & Poor's 500 Index entered the bear market last July.
UK government 5 and 10-year bonds rose for a second day as the Bank of England began its asset insurance program of gilt purchases, in an attempt to revive lending conditions and bolster the economy. The Central Bank bought £2 billion of government securities yesterday by creating money as part of quantitative easing policy, after the Treasury authorised purchases of up to £150 billion under the program.
In an effort to ward off the threat of deflation and revive lending conditions, the BoE embarked on a three month plan that may see it spend £75 billion, as investors offered more than five times as much as banks said it would buy.
The move represents a departure for UK monetary policy, as the Bank of England were forced to seek new tools in limiting the downward spiral in the economy. The governor Mervyn King is gambling that pumping money into the financial system will finally revive lending but he's relying on banks and mortgage providers to pass it on to consumers.
The Bank's monetary policy committee, led by the governor Mervyn King, have slashed interest rates by 4.5 percentage points since October to a historic low of 0.5%. The UK economy is headed for the worst recession since the Second World War and the overall pessimism in the financial sector means that policy makers have to look at less conventional techniques to revive growth, as banks fail to pass on the full extent of the rate reductions to their customers.
The Pound continued to decline against the Euro yesterday after another barrage of weak economic data pointed to a more aggressive slump in growth. A report from the National Institute for Economic & Social Research showed that gross domestic product fell 1.8% in the three months through to February.
In addition, a separate government report showed that the UK trade deficit unexpectedly widened in January, as the gap in goods and services with countries outside of the EU swelled to a record level. The global recession is weighing on demand for UK exports, as the trade gap swelled to £7.2 billion and manufacturing shrank by the most in at least forty-years.
Although the Pound was relatively unchanged after the report, the escalating gap in trade has reinforced concerns that it will not be able to provide any support to the economy. Exports plummeted at the fastest rate on record, over 9% during the last quarter, while imports also fell as domestic demand declined, as the economy contracted.
The Euro remained resilient against the Dollar yesterday, while the single currency continued the upside momentum versus the Pound, despite reports that German industrial orders collapsed in January, as the weakness in global demand suffocated exports.
Manufacturing orders plunged 38% from a year earlier to record the biggest drop since the data was compiled after the reunification of Germany in 1991. The Economy Ministry in Berlin said that the fall in orders was four time as much as economists had initially anticipated, extending the worst decline on record.
The German economy is heavily reliant on exports but the worst recession since the Second World War has curtailed the pace of global demand, as confidence in the world economy sank in March, after the recession proved deeper than first feared. ECB governing council member and Bundesbank President Axel Weber said that the "German economy is particularly badly affected because of the declining export demand".
The Euro's resilience will come under further scrutiny this morning, as the ECB monthly bulletin will probably indicate that policy makers will cut interest rates again in April. While industrial production will mirror the decline in German manufacturing orders and contract to the lowest level since the index began.
The Dollar and the Japanese Yen remain susceptible to the aggressive swings in risk sentiment and the U.S currency is advancing against the majors this morning, amid speculation that the global recession will increase demand for the relative security of U.S assets.
The Yen and the Dollar increased against the higher-yielding currencies, such as the Australian and New Zealand Dollar, after a report in Japan confirmed that the world's second largest economy contracted at the fastest pace since 1974.
The focus today will invariably fall on the performance of global stocks but the Dollar may come under some pressure against the majors, as government report is expected to confirm that U.S retail sales continued to decline, undermining confidence in the global economy. Data Released 12th March
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Quantitative easing hits Sterling
NZ rate announcement tonight
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 falls to the lowest level in five weeks versus the Euro after UK house sales fall by the most since 1978
The Pound fell to the weakest level in over five weeks against the Euro, while the UK currency remained susceptible to the aggressive swings in risk sentiment, after UK stocks gained for the first time in three days, as investors took advantage of the cheapest share prices in 10-years.
The benchmark FTSE 100 Index gained 172.83 points to register a 4.9% increase on the session, as banking stocks rallied with Barclays Plc jumping 9.9%, while HSBC Holdings Plc advanced 14% and Citigroup Inc said that the bank is having the best quarter since 2007.
However, the Pound failed to find any support as the UK currency also declined against a basket of currencies after a report from the Royal Institution of Chartered Surveyors showed that UK house sales slumped to the lowest level since at 1978 and manufacturing output shrank by the most in four decades.
The average number of transactions in a survey of real-estate agents and surveyors fell to 9.5% in the quarter through February, the lowest amount since the data was compiled almost thirty years ago. The number of new homes being built in Britain may fall to the lowest level since 1921 this year, as the recession deepens and demand falters.
The RICS house price balance adds to signs that the UK property market will remain weak for the remainder of the year, as the economy continues to deteriorate. Nevertheless, the report also highlighted that the measure of potential buyers registering with real-estate agents rose to the highest since August 2006.
UK mortgage rates declined in February by less than the full amount of the Bank of England's interest rate cut last Thursday and a statement from the Royal Institution of Chartered Surveyors said that "the lengthy process of obtaining mortgage finance, even for those with large deposits, is contributing towards a blockage in the market place".
The Treasury has granted the Bank of England permission to create and pump up to £75 billion into the economy, as part of quantitative easing policy after a series of rate reductions has done little to revive lending conditions. The Central Bank will begin buying toxic assets from struggling financial institutions to replenish balance sheets and encourage mortgage finance, as people become increasingly concerned over job security.
The Bank of England are the first Central Bank since Japan in the 1990s to begin quantitative easing and these factors combined are putting incredible downside pressure on the Pound. That is a theme that may continue in the near-term, despite the modest recovery in global stocks and the increase in risk appetite.
Elsewhere, the overall pessimism surrounding the Pound continued as a separate report from the British Retail Consortium showed that UK retail sales declined 1.8% from a year ago in February, as the slump in housing mirrors waning consumer demand. In addition, a report from the Office of National Statistics showed that UK manufacturing contracted by the most in forty years and for the 13th month in succession, as factory production sank 2.9% in January.
The Euro has made remarkable gains against the Pound, despite concerns over a deepening recession in the Euro-zone and the escalating losses in Eastern European banks. In addition, the single currency is finding support as the ECB remain reluctant to follow the Bank of England in beginning quantitative easing measures.
European Central Bank governing council member Axel Weber said that the ECB shouldn't cut its main interest rate below the 1% level and that he would prefer to keep the rate at a level that it would still accept overnight deposits at 0.5%.
His reluctance to continue the pace of monetary easing all the way down towards zero is in stark contrast to some members of the governing council. Executive Board member Lorenzo Bini Smaghi said that the bank is ready to lower rates to zero if the economy worsen and deflation becomes a threat.
The Dollar weakened against the majority of the 16-most actively traded currencies yesterday, as a bounce in global stocks reduced demand for the security of U.S denominated assets. The Dow Jones Industrial Average rallied following reports that Citigroup Inc is having the best quarter since 2007 and that the banks share price doesn't reflect its earnings potential or capital position.
The Dollar may extend its losses against the majors as the U.S unemployment rate will reach 9.4% this year and remain elevated through to at least 2011, as the declining labour market conditions threatens to curtail longer-term growth potential.
In addition, U.S wholesale inventories slumped 2.9% to $326.1 billion, the lowest level in over three years in February, indicating that businesses will pare orders further over the coming months amid a fundamental drop in domestic demand.
The Pound declines to a six week low against the Dollar as the government acquires a 77% stake in Lloyds Banking Group Plc
The Pound slumped to the lowest level in six weeks against the Dollar yesterday, falling to a low of $1.3750 in London. While the UK currency also plunged through the support at 1.1000 versus the Euro, to record a low of 1.0852 on the session, after Lloyds Banking Group Plc ceded control to the government in return for state-asset guarantees.
The Prime Minister Gordon Brown engineered Lloyds acquisition of HBOS Plc in October, amid concerns that the UK's largest mortgage provider was on the brink of collapse, and saddled Lloyds with £8 billion in risky loans and bad debt that curtailed profit.
The struggling bank was then forced to seek state guarantees, as about 83% of the £260 billion received by the government came from HBOS Plc, and the Lloyds Chief Executive John Varley said last month that the severity of the problems with HBOS forced them to rush through the due diligence of the acquisition.
The overall pessimism and lack of confidence in the banking sector is eroding confidence in Sterling, especially as wider orientated share prices remain under pressure. The Pound also weakened against the Japanese Yen and Swiss Franc, as shares in HSBC Holdings Plc plunged another 14% amid concerns that losses at its U.S unit will increase.
The HSBC Chairman Stephen Green confirmed last week that the 2003 purchase of Illinois based Household International was a mistake, which led to billions of dollars of losses as the U.S subprime mortgage market collapsed. Europe's biggest bank by assets has lost 18% in value since saying on March 2nd that it plans to sell £12.5 billion of new shares to existing stockholders, in an attempt to raise capital.
In addition, the potential impact of last week's quantitative easing measures were also significant for the Pound. While 10-year gilts slid to the lowest level in at least 20-years yesterday, as Bank of England policy makers prepare to purchase government and corporate bonds to inject cash into the deteriorating economy.
Following the decision to cut interest rates to a new historic low of March 5th, the Central Bank confirmed that it will buy £75 billion of gilts and corporate debt funded by new money in the next three months. The UK is the first country to begin quantitative easing since Japan tried to stimulate their economy in the 1990s by printing money.
The decline in banking stocks spurred a further downside move in Sterling towards the close of trading last night with the UK currency depreciating almost 3% versus the Dollar, to the lowest level since January 26th. The Pound is also approaching the lowest level in six weeks versus the Euro and economists at JP Morgan & Chase Co have urged investors to buy the Euro against the Pound.
A statement from their Head of Foreign Exchange strategy John Normand said that "Sterling will weaken in line with medium term monetary and fiscal realities", as the Bank of England cross a line that very few Central Banks are willing to consider.
Economic data released in the UK exacerbated the pessimism for the Pound, as a report from the Royal Institution of Chartered Surveyors showed that house prices fell by the most since 1978, while the BRC retail sales survey declined after last month's surprising improvement, as consumers took advantage of the January discounts.
The Pound broke through the major support level at $1.3853 versus the Dollar will alarming ease and that may trigger a move towards $1.3650 in the coming days. That support level will be saturated with buy orders and represents a 76% retracement of the Pound's gain to a high of $1.4986 on February 9th from it's 23-year low of $1.3503 reached on January 23rd.
The Euro took advantage of broad Sterling weakness yesterday as EU Finance Ministers convened to discuss the current monetary and fiscal problems facing the economy. After conducting "expansionary" fiscal policy this year, the next combat for the German coalition will be to reverse the steepest recession since the Second World War.
In terms of economic data, German exports declined for a fourth consecutive month in January, pushing the economy into a deeper recession than initially anticipated. Overseas sales slumped 4.4% from December, which was more than expected, following a fundamental lack of demand as most major economies slip into a simultaneous recession.
The degree of the decline in global equity markets spurred demand for the security of U.S assets yesterday, as the Dollar made substantial gains against the Pound and the Euro. Nevertheless, a rebound in stocks would curb demand from investors seeking refuge from the global financial crisis.
Elsewhere, the Dollar may also struggle to extend its recent rally against the majors if global markets stabilise, while economic data points to a worsening financial climate, as the jobless rate is expected to reach 9.4% this year and remain elevated until at least 2011.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Sterling suffers amid stock market tumbles
US Dollar sustains gains despite Non-farm payments data
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.If you have any questions or comments about this Podcast please leave a comment below or call TorFX now on 0800 612 9625.
Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound declines against the majors as global stocks plummet
Following on from last week, the Pound weakened against the Euro for the first time in four days on Friday, while the UK currency also found support under $1.41 versus the Dollar, amid falling stocks and concerns that the Pound will weaken in the medium-term, as the Bank of England prints money to revive lending conditions.
The Bank's Monetary Policy Committee elected to cut its benchmark interest rate to another all time low of 0.5%, from 5% in October. The accompanying statement also confirmed that the Bank will spend £75 billion buying corporate and government bonds over the next three months.
Following sharp losses in the FTSE 100 Index on Thursday, the UK stock market attempted a rally on Friday, but gains were limited amid fears over the impact of quantitative easing measures on the medium-term outlook for the Pound with reduced yield support for gilts.
The Pound also fell against almost all of the 16 most actively traded currencies, as a report from Morgan Stanley said that profits in the UK will plunge by more than during the Great Depression, as banking losses deepen and oil prices slide.
Over the couse of the week, UK stocks slipped 7.8% to record the biggest weekly drop in almost three months, as earnings at Morgan Stanley are forecast to tumble 60% from their peak, adding to the firm's recent data to indicate that profits have dropped by more than they did in the 1930s.
The escalating risk in equity markets is weighing on Sterling sentiment in the near-term and the Pound declined over 1% in value against the Euro on Friday, as UK 10-year government bonds surged higher, posting the biggest weekly gain since 1992.
The pessimism for the UK banking sector has undermined confidence in the Pound this morning, as reports suggest that Lloyds Banking Group Plc may have to cut jobs and close branches in order to return to profitability. The government took majority control of the struggling bank in exchange for guaranteeing risky assets and the CEO Eric Daniels said that Lloyds will have to slash costs to pay back the taxpayer-funded bailout by 2011.
The government orchestrated the merger of Lloyds and HBOS Plc in October, creating a bank with 3,300 branches, 140 employees and a 28% share of the UK mortgage market. The Prime Minister Gordon Brown sought to prevent the collapse of the UK's biggest mortgage provider, as Lloyds confirmed that they rushed through due diligence to take on an £8 billion shortfall.
Savings from elimiating duplicated services and reducing employment will exceed £1.5 billion by 201, Lloys estimated last year, but making those changes are proving to be politically difficult for a government controlled bank, as unemployment may rise to 3.2 million by the second half of 2010.
The number of Britons out of work and receiving jobless benefits rose to 73,800 to 1.23 million in January, the highest since July 1999 and the 12th increase in succession. The unemployment rate was 6/3% in the three months through December, up from 5.8% in the previous quarter.
Elsewhere, shares in HSBC Holdings Plc fell 11% to the lowest level since July 1996 and Europe's largest bank has lost 32% since announcing last week that it will sell new shares to existing stockholders at the equivalent of $28 a share.
HSBC are raising £12.5 billion in a rights offer amid concerns about bad loans at its U.S unit and the Chairman Stephen Green said last week that the 2003 purchase of Illinois based Household International, led to the billions of dollars of losses as the U.S housing market collapsed.
In terms of economic data, news on the UK economy is relatively light this week, with the focus falling on the BRC retail sales survey for February. In addition, the Pound may struggle to find support as industrial production is expected to confirm that output continued the pace of contraction seen over recent months, reflecting the drop in domestic and overseas demand.
The Euro declined below $1.25 against the Dollar last week but the single currency has taken advantage of broad Sterling weakness, despite concerns over a deeper recession in the Euro-zone. The ECB cut interest rates by 50 basis points last week to bring the benchmark lending rate to 1.5%, the lowest level in the Central Bank's history.
The focus this week will largely fall on risk sentiment but a number of key economic indicators are due for release in the Euro-zone with the PMI manufacturing index expected to weaken further. The ECB's monthly bulletin on Thursday will probably be similar in tone to the accompanying press conference last week, where the chairman Jean-Claude Trichet failed to give any indication of quantitative easing policies.
The Dollar reached the highest level since April 2006 against the currencies of six U.S trading partners, as global stocks plunged and spurred appetite for risk aversion. AIG Inc needed further government support and the Federal Reserve Chairman Ben Bernanke said that the U.S baning system had not yet stabilised.
The U.S currency also found some support as the non farm payrolls report on Friday showed that U.S job losses slowed in February, as employers elimiated 651,000 jobs last month, while the jobless rate increased to 8.1%, the highest level since December 1983.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
Today:
Sterling gains against the high yielding currencies
ECB + MCP rate announcements and quantitative easing measures
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 remains unchanged against the majors, after the Bank of England cut interest rates to 0.5%
The Pound rallied against the Euro for a third consecutive day yesterday, while the UK currency remained relatively unchanged versus the Dollar, amid speculation that the Bank of England made the last in a series of rate cuts yesterday, bringing the benchmark lending rate to the lowest level in the Central Bank’s history.
The Bank’s monetary policy committee took the decision to lower UK interest rates by a further 50 basis points to an historic low of 0.5% and said that it will spend £75 billion buying corporate and government bonds over the next three months. While the corresponding statement from the ECB failed to provide any indication that policy makers will engage in quantitative easing measures in the Euro-zone.
The BoE have now reduced interest rates by 4.5 percentage points since October alone, as credit markets remain frozen, despite the Bank’s actions and net lending to consumers rose at the slowest pace since at least 1993 in January.
The UK economy has contracted 1.5% in the fourth quarter, the most since 1980, following a drop in consumer spending. The former deputy governor of the BoE John Gieve said last month that the UK faces a "serious risk" of a decade long recession.
To that end, the statement from the MPC yesterday also pointed out that the reduction in UK interest rates would leave a "substantial risk of undershooting the 2% CPI inflation target". The bank also said that "the committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending".
The Treasury has granted the Bank of England the authority to print money and pump it into the economy, in a final effort to revive lending conditions, as the most aggressive policy easing in history has done little to halt the worst recession in almost thirty years.
In a statement yesterday, the Bank confirmed that it will buy as much as £150 billion in government and corporate bonds, sparking a rally across the debt market, after policy makers cut rates to near zero per cent.
The Bank of England have followed the Federal Reserve in cutting rates to zero but European central banks are adopting different techniques in reversing deepening recessions, at the same time as they run out of room to cut rates.
A former member of the Bank of England’s monetary policy committee Charles Goodhart said yesterday that “we’re moving into a new world in the UK from interest rate adjustment to quantitative easing”, indicating that policy makers may have come to the end of its rate cutting cycle.
Along with the Bank of England's measures, the government has pledged billions of pounds to shore up the UK banking system, last week promising £325 billion of support to the Royal Bank of Scotland Group Plc, while Lloyds Banking Group Plc is also in talks on a government asset insurance program.
In the aftermath of the rate announcement, UK 10-year government bonds rallied, pushing the yield down by 40 basis points, the lowest level since at least 1992, while the Pound pushed higher against the Euro amid suggestions that the Bank of England are ahead of the curve in comparison the lacklustre ECB.
The ECB President Jean-Claude Trichet said yesterday that he isn’t yet prepared to expand his armoury to less conventional policy tools but confirmed that the Central Bank will reduce interest rates again over the coming months.
In terms of economic data, UK house prices fell by the most in at least 26-years in February, as the worsening recession and rising unemployment curtailed demand for homes, according to a report from the Halifax. In the three months through February, home values declined 17.7% from a year earlier, the most since the survey began in 1983, as prices from January alone dipped 2.3% to an average of £160,327.
The Euro fell by the most against the Dollar in over two weeks yesterday, as the European Central Bank cut interest rates by 50 basis points and signaled further reductions are likely over the coming months. Policy makers are struggling to cope with the escalating banking losses in Eastern Europe, while a number of key economic indicators have shown that the recession is worsening.
The tone and language used in the accompanying press conference was a bit more detailed on the potential for further policy measures, but the chairman Jean-Claude Trichet neglected to give any further insight into whether the ECB would begin purchasing corporate bonds, as interest rates cuts lose their potency.
The European economy is shrinking faster than the ECB predicted just three months ago, as the simultaneous recession curbs demand for Euro-zone exports and companies shed the workforce. Trichet also conceded yesterday that he expects inflationary pressures to stay "well below" its 2% target this year and next.
In terms of economic data, the Euro also came under renewed downward pressure as European consumer spending and investment contracted buy the most in at least 13-years in the fourth quarter. Gross domestic product contracted 1.5% from the previous three months, as investment spending fell 2.7%, the most since both series started in 1995.
The Dollar rallied against both the Euro and the Pound yesterday, as the actions taken in Europe increased demand for the security of U.S assets. The greenback also stood firm despite reports that more than 600,000 Americans filed initial claims for unemployment benefits, while U.S factory orders fell for a sixth consecutive month.
The focus today will inevitably fall on the U.S non farm payrolls numbers and the report is expected to show that the economy lost another 640,000 jobs in February, while the unemployment rate is expected to edge higher towards 7.9%, from 7.6% the previous month.
The Pound advanced against the majors yesterday, after UK stocks advanced for the first time in four days
The Pound rose against the Euro and the Dollar yesterday, after UK stocks rebounded for the first time in four days, and a survey showed that UK consumer confidence rallied in February from the lowest in at least four years.
According to a report from the Nationwide Building Society, an index of sentiment increased to a reading of 43, from 41 in January, which was the worst set of results since the data was compiled in 2004.
The FTSE 100 Index rose from the lowest level since March 2003, led by a rebound in commodity producers, amid speculation that China will announce a fresh economic stimulus package. The revival in the stock market encouraged investors to buy into ‘riskier’ assets and dump the so called haven currencies like the U.S Dollar and Japanese Yen.
The Pound also advanced against the majority of the majors, following suggestions that the Bank of England will revive economic growth by cutting the benchmark lending rate to a new record low this lunchtime.
The Governor of the Bank of England Mervyn King is under pressure to spell out plans to revamp monetary policy and print money, as policy makers prepare to cut rates by a further 50 basis points to 0.50%, the lowest level since the Central Bank’s foundation in 1694.
The Treasury will also give the Bank the authority to create money and pump it into the economy, as the government struggles to rescue the economy shrinking by the most in almost thirty years.
The Chancellor Alistair Darling has said this week that the Bank of England has the necessary “levers” and may decide to use them over the next month. While the Treasury are expected to publish its formal approval of the Bank’s plan to print money today, when it releases Darling’s correspondence with Mervyn King.
The focus will fall on the accompanying statement, where policy makers may signal that they’re ready to buy government bonds and toxic debt as part of quantitative easing measures.
The Bank of England have been forced to look at less conventional techniques to bolster the economy, after record low interest rates lose its potency, and the Pound may continue to make gains, amid speculationthat the increase in capital will spur an economy recovery.
The Prime Minister Gordon Brown was in the U.S yesterday to address Congress and he urged governments around the world to support their economies by cutting borrowing costs towards zero, while raising fiscal spending, saying that Britain and the U.S cannot act alone.
Elsewhere, investors have been encouraged to buy Sterling against the Japanese Yen, amid signs that the UK recession is unlikely to deepen further, while the Pound is heading for its third weekly gain after data revealed that UK service sector growth fell less than initial forecasts.
The Euro fell against the Pound yesterday, slipping back towards the support at 1.1270 last night, while the single currency also lost ground against the Dollar, amid speculation that the ECB President Jean-Claude Trichet will lower the key interest rate today.
Trichet has signalled on numerous occasions that the Central Bank will cut interest rates in March but the focus will inevitably fall on the accompanying statement, where policy makers may signal that further rate reductions will be needed to curb the worsening recession.
The Euro is poised to record a fourth weekly decline against the Dollar,as a raft of weakening economic reports show that the economy shrank by the most in at least 13-years in the revised estimate for the fourth quarter.
In the build up to the announcement, German retail sales unexpectedly declined in January, amid suggestions that consumers are becomingincreasingly concerned over the security of their jobs and subsequently reined in spending.
Germany is battling the worst recession since the Second World War and the International Monetary Fund expects the economy to contract 2.5% this year, as unemployment rises for the fourth consecutive month in succession.
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The Pound continues to decline as the FTSE 100 Index extends the downside move beyond the six year low
The Pound declined against the Dollar for the second consecutive day yesterday, dropping under the support at $1.4000, before finding resistance at $1.4150 by the close of trading last night. The UK currency also traded at close to a two-week low versus the Euro, amid speculation that the Bank of England will cut interest rates on Thursday and increase money supply through the purchase of corporate bonds.
Reports yesterday suggested that the Treasury would give the Bank of England the go ahead to implement quantitative easing measures ahead of the monthly announcement and there will be speculation that the MPC will move quickly to a policy of directly boosting money supply.
The Chancellor of the Exchequer Alistair Darling also gave an indication yesterday that the Central Bank will start printing money this week in an effort to bolster the economy, as interest rate cuts lose their potency. The Bank have been given the authority to use as much as £200 billion for the purchase of government securities and other toxic assets.
The Pound remained under pressure against a basket of currencies amid suggestions that policy adjustment will become more expansionary in the UK compared to Euro-zone and that has pushed Sterling towards a two-week low of 1.1100 versus the Euro. The BoE will probably cut rates by a further 50 basis points on Thursday and may announce some method of quantitative easing, while the market remains uncertain on what the ECB will do.
However, the Pound may rebound against the Euro once the interest rate announcements are out of the way, particularly considering the downside pressures within the Euro-zone and the escalating pessimism over the chances of an economic recovery. The Pound may even breach the 1.1602 level against the Euro, which would represent a 50% retracement of the downside move between 1.3000 and 1.02006, the December 30th low.
UK stocks declined for a third straight day, with the benchmark FTSE 100 Index extending its six year low, amid concerns that banks may have to raise more capital as the recession deepens. Barclays Bank Plc and the Lloyds Banking Group Plc slumped at least 6% on the session, after the Fed Chairman Ben Bernanke said that the banking system has not yet stabilised and policy makers may need to inject further capital, beyond the $700 billion already approved.
The correlation between the Pound and the stock market has become increasingly prevalent in recent months and the UK currency continued to decline against the Dollar yesterday, as the extended drop in the FTSE spurred demand for havens.
In terms of economic data, UK manufacturing contracted for a 10th consecutive month in February, while consumer lending rose at the slowest pace since records began in 1993. A separate report from the Confederation of British Industry showed that the building industry is contracting at the fastest pace in 12-years, as the Treasury's plan to provide finances to £13 billion of government sponsored building projects stalled, due to the lack of bank finance.
Elsewhere, a report from the Nationwide Building Society showed that UK consumer confidence remained close to the lowest level in at least four years in February. The index of sentiment rose to a reading of 43 from 41 the previous month, as the recession worsened and forced companies to shed jobs.
The Euro rose higher against the Dollar in early trade yesterday, peaking close to resistance at $1.2680, before drifting weaker later in the session. Following the Australian Reserve Bank's decision to keep interest rates on hold, there was increased speculation that the ECB would resist an aggressive policy easing on Thursday, helping to rekindle some appetite for the single currency.
However, the tentative increase in the Euro quickly faded as confidence remained weak and the single currency may struggle to stem the losses against the Pound, as stock markets rebound from the recent lows. In terms of economic data, European retail sales are expected to fall 2.1% year-on-year in January, consumer spending waned and unemployment rose in all of the major economies.
The Dollar remained resilient against the majors, despite the dismal tone of U.S economic data, which showed a further drop in pending home sales for the month of January. The raft of weakening economic reports is actually instilling more confidence in the Dollar, as fear grips the market and investors seek the security of U.S assets.
The Fed Chairman Ben Bernanke gave a testimony to the Senate yesterday and took a downbeat stance on the chances of a recovery, warning of the threat of stagflation if authorities do not act aggressively to stimulate the economy. Bernanke was also very critical of the developments and continued bailout of AIG, moved towards a political judgment on the banking situation.
The Pound tumbles against the majors after UK stocks plunge by the most in six years
The Pound tumbled against the majors yesterday, dropping under $1.4000 versus the Dollar for the first time in over a month, while the UK currency also fell below 1.1100 against the Euro, amid the biggest decline in banking stocks in almost 25-years, following reports that HSBC Holdings Plc will post the UK's biggest rights offering.
The pessimism surrounding the UK banking sector and fears over nationalisation has curtailed the Pound's upside momentum for the timebeing. A statement from HSBC yesterday showed that the struggling bank plans to raise £12.5 billion in capital, by slashing 6,100 jobs and plans to close consumer lending units in the U.S, after the collapse of the subprime mortgage market cut profit.
Europe's largest bank by market value will also sell shares for £2.54 each, with existing investors able to buy five shares for every 12 they already own but in the aftermath of the statement, the stock price fell 19% to record the biggest drop since July 1992.
HSBC said that full-year net income slumped 70% after losses in the U.S, where the struggling bank accquired Household International Inc, the biggest lender to homeowners with poor credit histories, some six years ago. HSBC, which nets approximately 75% of the profit from emerging markets, must now cope with simultaneous recessions in some Asian economies.
The decline in HSBC and the biggest slump in banking shares for over twenty years sparked a massive downward move in the FTSE 100 Index, as stocks fell to the lowest level since 2003. The subsequent increase in risk aversion saw the Pound drop against the majority of the 16-most actively traded currencies, including the Swiss Franc and Japanese Yen.
By the close of trading last night, the FTSE 100 Index had slumped 5.3% to the lowest level in six years, led by the declines in HSBC, and the Pound slump 2.2% to a low of $1.3858 versus the Dollar, as the focus switches to the Bank of England interest rate decision this Thursday.
In addition, the downside momentum in Sterling was further exacerbated by a string of weak economic data, as banks granted fewer mortgage applications than previosuly estimated in January, while UK house prices declined 10% from this stage in 2008, adding to recent evidence that the recession is worsening.
Banks and building societies approved 31,000 new mortgages in January, close to the decade low of 27,000 in November, while the number of new buyers registering with property companies increased 17% in February, as prices fall across the UK and sellers acheive less than 90% of the asking price.
The slump in mortgage and net lending illustrates the fundamental lack of credit available in the UK, while a separate report from Hometrack Ltd showed that house prices fell the most since the survey began in 2001, as unemployment rose and banks restricted lending.
The average cost of a home in the UK declined 10% from a year earlier to £157,000, as prices slipped 0.8% on the month, after the economy contracted at the fastest pace since 1980 in the fourth quarter and the jobless rate rose to the highest level in 10-years.
Elsewhere, a separate report from the Chartered Institute of Purchasing and Supply showed UK manufacturing contracted for a 10th consecutive month in January. Consumer lending rose at the slowest pace since at least 1993 and the decline in industrial production indicates a lack of demand for British made goods, despite the drop in value of the Pound.
An index based on a survey of factories fell to a reading of 34.7 in February, from 35.8 the previous month, and the reading is the weakest since the the survey reached a 17-year low in November, as a measure of employment and production slumped at the rate since the data was compiled.
The Euro took advantage of broad Sterling weakness yesterday but the single currency came under further selling pressures against the Dollar, consolidating under $1.2600 last night, after European manufacturing shrank at a record pace in February.
A gauge of industrial activity declined to a reading of 33.5 from 34.4 in January, which was lower than initial estimates, and indicates that the decline in export demand is pushing the Euro-zone economy into the steepest recession since the end of the Second World War.
European consumer confidence has fallen to a record low in January, while banks have restricted credit as the global financial crisis curtails the purchases of cars and factory machinery. The Euro is also under pressure amid speculation that Eastern European banking losses will drag the economy into a sharper contraction in the first quarter, as unemployment rises and increases the pressure of the ECB to step up interest rate reductions.
The Dollar rallied against the majors last night and rose to the highest level since April 2006 versus the currencies of six major U.S trading partners, as the slump in global stocks encouraged investors to seek the security of U.S assets.
The Dow Jones Industrial Average slipped below 7,000 for the first time since 1997, while treasuries rose after the billionaire Warren Buffett said that the economy is in "shambles" and AIG International Group Inc posted the largest corporate loss in U.S history, requiring further government aid.
In terms of economic data, the ISM manufacturing report showed that output in the U.S contracted in February for the 13th consecutive month, as factories scaled back production. Elsewhere, a separate government report showed that consumer spending rose for the time in seven months, despite the rising jobless rate.
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Today:
Predictions for the ECB and MPC rate cuts
Dollar resistance to negative data
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The Pound declines against the majors, as banking shares plummet following the decline in Lloyds Banking Group Plc
Following on from last week, the Pound came under further selling pressure against the majors, dropping under the support at $1.4200 versus the Dollar and 1.1300 against the Euro. The UK currency was unsettled by concerns within the banking sector, as the share price for Lloyds Banking Group Plc slumped 30% on Friday, following the publication of the annual results that were worse than economists had anticipated.
In addition, an increase in risk aversion stalked the market and drove investors away from the Pound, after a barrage of weak economic data indicated that the recession is deepening. UK consumer confidence held close the lowest level in over 30-years, while stock markets around the world tumbled amid concerns over worsening global slump.
The Pound also declined amid comments from Bank of England policy maker David Blanchflower, who said last week that the recession will probably deepen "significantly", as more than 40% of British mortgage holders may see their loans exceed the value of their homes by the end of 2009.
The pessimism surrounding the banking sector and the threat of nationalisation saw the FTSE 350 Banks Index fall by the most in over five weeks on Friday, as Lloyds Banking Group Plc said it hadn't yet reached an agreement on a government asset-insurance plan.
The Bank of England have been given the mandate to create a 'bad bank' and provide some relief to struggling financial institutions by purchasing toxic debt and corporate bonds in a last ditch attempt to revive lending conditions that has seen house prices tumble by the most since 1974.
The protracted recovery in Sterling sentiment has certainly been put on hold for the time being, as the UK currency lost as much as 1.4% against the Dollar on Friday, which correlated with a 2.2% drop in the FTSE 100 Index, while all major European equity markets declined.
The renewed weakness in the Pound may continue this week, as the focus switches to the Bank of England's interest rate announcement on Thursday. The Monetary Policy Committee, led by the governor Mervyn King, are widely expected to lower the benchmark lending rate by a further 50 basis points to a fresh historical low of 0.50%.
Investors will be closely watching the accompanying statement for any details on the Bank's plan to engage in quantitative easing measures. The Pound may also come under pressure in the build up to the announcement, as the modest increase in manufacturing and services industries over the past two months is not expected to continue.
Both indices are expected to resume the downward trend, while other reports of note will include the Halifax house price index and producer prices for February, while the focus this morning will fall on UK mortgage approvals, which will probably reveal a small increase to 32,000 with lending down to £1.5 billion.
The pessimism surrounding the outlook for the Euro-zone economy and the exposure to eastern European banking losses has weighed on the single currency over the past week, as the Euro dropped under $1.2500 against the Dollar on Friday and looks poised to extend the decline this week.
The Euro-zone economic data released last week also pointed to a worsening economic slump, as German unemployment rose to 8.3% in January, up from a revised 8.1% and although the provisional inflation numbers were higher than expected, the ECB is set to cut interest rates on Thursday.
The Central Bank's governing council committee elected to slash borrowing costs by a further 0.50%, bringing the benchmark lending rate under the 2.0% ceiling. The focus will also switch to the tone and language used in the accompanying statement from the Chairman Jean-Claude Trichet, as investors look for any insight into the whether we are close to the end of the easing cycle. The odds appear to be stacked against a move below 1.0% and the Euro is declining in early trade this morning with signs of tensions between EU leaders.
The Dollar rose to the highest level in almost three years against the currencies of six major U.S trading partners, as the deepening economic slump and the third government bailout of Citigroup Inc stoked demand for the security of U.S assets.
The U.S currency gained 0.8% against the Euro on Friday, despite reports that the economy contracted at an annual pace of 6.2% in the three months through December, the most since 1982. The government estimated that U.S gross domestic product shrank 3.8% in the advanced estimate released last month but the severity of the decline did little to hamper Dollar sentiment in an environment of risk aversion.
Data Released 2nd March
U.K 09:28 CIPS Manufacturing PMI (February)
U.K 09:30 Mortgage Lending (January)
- Approvals
EU 08:58 Manufacturing PMI (February)
EU 10:00 Harmonised Index Consumer Prices (Flash Estimate)
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