The renewed bearish sentiment surrounding the Pound continued yesterday as the UK currency plummeted 0.9% against the Dollar and recorded significant losses versus the Euro following two consecutive days of gains.
A report from Nationwide Building Society showed that UK house prices dropped by the most in 12-years this month while mortgage approvals fell to the lowest level in nearly 3-years.
The average cost of a home declined 0.8% from October, which represents the single biggest monthly decline since June 2005 and the report provides yet further evidence that the decade long housing boom is coming to an end.
In addition, the number of UK mortgage applications plummeted to the lowest level since February 2005 amid renewed concerns over a second credit crunch and the BoE’s decision to lift interest rates to the highest level in 6-years.
The gloomy outlook for the UK economy has led to speculation that growth will slow and that will prompt the Bank of England to lower interest rates by 75 basis points over the next six months.
Strong consumer spending, low unemployment and rising home values have been the catalyst for the UK economy reaching the fastest pace of economic expansion since 2004. However, Nationwide predicts that UK house prices will stall next year and contract for the first time since 1992 as a slowing economy and a crisis in credit curbs demand.
The volatility surrounding equity markets yesterday and the failure to extend their gains weighed on most high-yielding currencies, including the Euro, which fell 0.4% against the Dollar last night.
Economic data in the Euro-zone was mixed yesterday and therefore the move can be attributed to a broad base Dollar recovery after the U.S currency fell to a fresh record low earlier this week.
The strength of the labour market was again apparent in Germany as unemployment fell by more than initial forecasts in October while retail data in France was weaker. Elsewhere, the Euro has struggled to recover this morning and has traded back above 1.4000 versus the Pound after German retail sales had the biggest drop in nearly a year last month.
Despite strong growth in the labour market, sales fell 3.3% from September as rising food and fuel costs hamper spending amid signs that growth in the German economy is losing momentum.
Although the Dollar appeared to make gains against both the Pound and the Euro yesterday, the negative sentiment surrounding the U.S currency continues as a barrage of negative economic reports increase the prospect of further monetary easing next month.
The worst housing slump in nearly 17-years combined with slowing economic growth has seen the Federal Reserve lower interest rates by 75 basis points in just two months and yesterday a report from the Commerce Department showed a further drop in the sales of new homes.
The collapse of the U.S subprime mortgage market and the turmoil surrounding the financial sector has seen projections that the housing recession will extend in to next year even as home values dropped by the most in nearly 40-years.
Elsewhere, a separate report on the revised estimate of U.S gross domestic product showed that growth in the economy accelerated in the third quarter before the impact of the housing slump was realised.
The Dollar came under renewed pressure against the Pound yesterday and suffered a sharp intraday reversal versus the Euro having fallen to a low of 1.4712 earlier in the session.
The volatility surrounding U.S stocks has seen the Dow rally 500 points over the past two trading days and recent comments from a number of Fed officials have portrayed varying sentiment on the outlook for the U.S economy.
Earlier in the week, hawkish comments from both Evans and Plosser seemed to focus on rising inflationary concerns while a statement yesterday from FOMC member Kohn indicated that growth in the economy would continue to slow as the housing slump deepens.
In terms of economic data, Dollar sentiment was further hampered amid reports that sales of existing homes fell to the lowest level in eight years. Purchases dropped 1.2% in October, which was more than initial forecasts, and fell to an annual rate of 4.97 million, the fewest amount since records began in 1999.
Sales were down 0.7% from this stage last year as loan restrictions and the prospect of further price declines has led to tighter lending conditions.
Elsewhere, a separate report from the Commerce department showed that a weak Dollar is failing to provide a boost to U.S manufacturers as orders for durable goods fell more than anticipated in October.
The report supports comments yesterday from Federal Reserve Vice Chairman Donald Kohn, who warned that the market “turbulence” may discourage business and consumer spending.
The Euro managed to claw back most of the losses suffered against the Dollar yesterday but continued the recent downside momentum versus the Pound despite reports that German inflation accelerated to the fastest pace in eleven years.
The harmonized index of European consumer prices rose 3.3% from a year earlier after increasing 2.7% the previous month. Thus far, the European Central Bank have refused to panic over the Euro’s overwhelming appreciation against the Dollar given that oil prices have increased 89% since January while foods costs rose to a record level.
Therefore, the Euro’s ascent to a record high against the Dollar is making imports cheaper while persistent inflationary concerns means that the ECB are unlikely to lower interest rates in the near-to-medium term.
The Pound rallied against both the Euro and the Dollar last night amid renewed appetite for high yielding currencies combined with a hawkish commentary from Bank of England policy maker Andrew Sentence.
Although many economists and traders are anticipating a cut from the BoE in December, Sentence’s comments yesterday seemed to suggest that setting monetary policy in the months ahead will be particularly challenging.
The monetary policy committee must attempt to balance a slowing economy against the renewed risks to price stability as inflation rises above the 2.0% target following rising fuel and food costs.
The lack of UK economic data released this week means that the market has yet to receive any fresh direction on the probability of UK interest rate cut.
The negative sentiment surrounding the Dollar has seen the U.S currency plummet to fresh multi-year lows against all of the 16 most actively traded currencies as the Federal Reserve continue to lower interest rates to provide some relief to the ailing U.S economy.
Nevertheless, the Dollar stemmed any further losses against the majors yesterday as the focus of attention switched to the volatility in the stock market amid reports that Citigroup had received a cash injection of $7.5 billion in the hope of stabilizing the Bank following another round of redundancies earlier this week.
In terms of economic data, the Dollar also stood firm amid reports that U.S consumer confidence fell by more than initial forecasts in November as surging fuel costs and falling home values damage sentiment.
The index of confidence fell to a reading of 87.3 this month, the lowest level since the months that followed Hurricane Katrina in 2005 while home values decreased 4.5% year-on-year in the third quarter.
The gloomy outlook for the U.S economy has Fed policy makers severely cut growth forecasts as the worsening housing slump begins to weigh on consumer spending.
The report yesterday will only increase speculation that the Fed’s Open Market Committee may continue monetary easing on the 11th December.
The European Central Bank have adopted a staunchly hawkish stance on monetary policy in recent months and that has seen the Euro rally to the highest level ever recorded against the Dollar and to a four-year high versus the Pound.
Despite mounting political pressure and market criticism, the ECB have chosen to focus almost exclusively on the impact of rising inflationary pressures, particularly with the price oil soaring to within a whisker of $100 a barrel.
However, following an increase in production in Saudi Arabia, oil prices fell $2 throughout the course of yesterday while German business confidence declined to the lowest level in almost two years.
The Ifo sentiment index slipped to a reading of 103.3 this month, the lowest level since January 2006, and as a result, the Euro fell against both the Pound and the Dollar by the close of trading last night.
Considering the fundamental lack of UK economic data released this week, the Pound is largely driven by risk appetite and the tone of U.S economic reports as the market looks for further direction on UK monetary policy.
The Bank of England have so far been reluctant to comment on the probability of an interest rate cut next month as mounting inflationary concerns may keep the Central from lowering rates until the first quarter of next year.
The tone of the minutes from the Bank’s last policy meeting and the language used in the quarterly inflation report seemed to indicate that policy makers would need to lower borrowing costs by 75 basis points over the next year in order to stabilize the economy and provide some relief to the financial sector.
The Pound snapped a three day losing streak against the Euro yesterday and also made gains versus the ailing U.S Dollar despite the distinct lack of UK economic data due for release this week.
Therefore, Sterling sentiment will be largely dependent on the economic fundamentals in Europe and the U.S and the market’s demand for risk aversion amid renewed concerns over a fresh credit crisis.
In addition, the Pound received an unexpected but timely boost yesterday as Bank of England policy maker Bean said that the current level of inflation may require tighter monetary policy.
His comments yesterday will only serve to quash speculation that the Bank of England may cut interest rates as early as next month amid higher oil prices and slowing economic growth.
The market is currently pricing in three quarter-point rate cuts by the middle of next year but any further hawkish commentary from BoE officials may warrant a re-pricing of expectations.
However, the MPC may have little choice but to lower rates in the near term as UK house prices fell for a second month in November as soaring credit costs damaged consumer confidence among first time buyers.
According to a survey from Hometrack Ltd, the average cost of a home in the UK slipped 0.2% from the previous month while prices have increased 3.6% year-on-year, the smallest rise since July 2006.
The tentative price action surrounding the Euro has seen the single currency consolidate just under the record high of 1.4962 versus the Dollar and given the overall sentiment surrounding financial markets, the probability of an upside breakout towards 1.5000 seems inevitable.
Elsewhere, the Euro continues to hover around 1.3900 against the Pound and the overwhelming upside momentum will undoubtedly be of concern to policy makers as the ECB President Trichet said last week that the Central Bank is opposed to brutal moves in the currency market.
However, a host of hawkish commentary from a number of ECB officials has seen the ECB retain a bias towards tighter monetary policy as rising consumer price inflation offsets concerns over slowing economic growth.
The renewed concerns over a further crisis in credit saw an increased level of volatility towards the end of the U.S trading session last night as the Dollar plummeted against most of the 16 most actively traded currencies while the Dow Jones fell 237 points on the session.
In addition, the cohesive decline in financial markets yesterday will spark fresh concerns over the state of the U.S economy and reflects the growing possibility of a recession.
Therefore, the focus today will fall on the consumer confidence report for November as the level of spending and the degree of leniency that lenders extend to their customers may supplement the worst slump in housing since 1990.
Following on from last week, the outlook for the Pound deteriorates almost by the day as the UK currency continued to slide against most of the 16 most actively traded currencies following reports that UK economic growth unexpectedly slowed.
Gross domestic product rose 0.7% in the third quarter, which fell slightly below initial forecasts and to the weakest level in a year as growth in service industries cooled and factory production declined.
The report on Friday will only add to concerns that the UK economy is slowing but the Bank of England will have to balance slower growth against record high commodity prices, which will only add to the persistent inflationary pressures.
Therefore, the Pound may struggle to make gains in the build up the December rate announcement where speculation is building that the monetary policy committee will cut interest rates by 25 basis points.
The Bank’s quarterly inflation report seemed to suggest that a reduction in the benchmark lending rate would be necessary to spur growth as the impact from the U.S subprime mortgage crisis limits access to credit.
The Euro has appreciated 12% against the Dollar this year and continued to make robust gains against the U.S currency last while also rising to the highest level in 4-years versus the Pound as the ECB adopt a staunchly hawkish stance in the face of slowing growth.
However, towards the end of the week, the Euro failed to hold on to those gains and struggled to sustain the upside momentum against the Dollar amid a host of surprisingly poor economic fundamentals.
European manufacturing expanded at a moderate pace in October while growth in service industries stalled and French consumer spending declined by the most in over a year.
The overwhelming strength of the Euro has been offset with persistent inflationary concerns as oil prices continue to flirt with $100 a barrel.
Therefore, the ECB’s governing council must balance the renewed risks to price stability against the possibility of slowing economic growth and that may prompt the Central Bank to alter their staunchly hawkish monetary stance over the coming months.
The Thanksgiving holiday has seen a lot price action surrounding financial markets and yesterday the Dollar dropped to the lowest level ever recorded versus the Euro amid speculation that U.S credit market losses will force the Federal Reserve to lower interest rates. The FOMC have lowered the benchmark lending rate by 75 basis points over the past two months and the Dollar is poised to record its biggest weekly decline since September after both Merrill Lynch & Co and Citigroup Inc said that the Fed will need to lower interest rates by 1 percentage point. The dwindling sentiment surrounding the U.S currency is likely to continue over the coming weeks as the worst slump in housing for over 17-years combined with slowing economic growth may encourage policy makers to lower rates next month. U.S house prices fell in a third of all U.S cities in the last quarter as tighter lending conditions combined with a slowing economy saw sales decline 14% nationwide. The report from the National Association of Realtors said that prices dropped in 54 metropolitan states in the third quarter while sales tumbled 2.0%. Declines in sales and home values signal that the housing slump may extend into the next year, which mirrors the slowdown 18-years ago that ended with the recession in 1991.
The Pound rose to a high of 2.0750 against the Dollar overnight but has fallen significantly in early trade this morning after UK economic growth unexpectedly slowed to the weakest pace in a year during the third quarter. Growth in service industries cooled and factory production stalled in the in the three months through to September as UK gross domestic product rose 0.7% despite initial forecasts of a 0.8% increase. However, according to the report from the Office of National Statistics, the annual pace of growth was 3.2% from this stage last year, which is the most since 2004, although according to reports from the Bank of England the economy is slowing.
The Euro rose to a fresh record high against the Dollar yesterday, peaking at 1.4873 before closing 0.1% lower at 1.4840 amid another round of positive economic reports, which showed that German consumer spending rose 0.5% in the third quarter. Despite a strong currency and the inevitable impact on export growth, the German economy continues to expand as companies and consumers increase spending and corporate investment. Europe’s largest economy has expanded in the fastest pace since 2000 but there are signs that growth is slowing after the collapse of the subprime mortgage market and the subsequent upward pressure on credit costs. However, the European Central Bank has retained a staunchly hawkish stance on monetary policy as inflationary pressures continue to mount following the upward swing in commodity prices. A separate report yesterday showed that German import prices increased by the most in almost a year in October, led by the overwhelming increase in oil prices over the same period.
The renewed weakness in Sterling continued to dominate the market yesterday as the UK currency plummeted to the lowest level in four years versus the Euro following reports that Bank of England policy makers voted 7-2 to keep UK interest rates unchanged this month.
The majority of the nine-strong committee agreed that further evidence was needed before a potential reduction in rates but David Blanchflower was joined by Deputy Governor, John Gieve, in arguing for the first cut in more than two years.
Over the past month, UK consumer prices have risen back above the Bank’s 2.0% target and record high oil and commodity prices may stoke the already persistent inflationary concerns.
Nevertheless, the tone and language used in the report suggests that the Central Bank could lower the benchmark lending rate as early as next month amid renewed uncertainty surrounding financial markets.
The collapse of the U.S subprime mortgage market led to a run on the fifth biggest UK mortgage lender, Northern Rock plc and a crisis in credit will inevitably lead to drop in consumer spending.
In a statement last week, Mervyn King acknowledged that growth in the UK economy is poised to slow significantly over the next year while the Bank of England’s quarterly inflation report indicated that there will at least one rate cut in 2008.
The positive sentiment surrounding the Euro has seen the single currency appreciate 11% against the Dollar over the past three months alone as the staunchly hawkish stance of the ECB combined with the remarkable resilience of the European economy has contrasted perfectly to the deterioration of U.S economic growth.
The Euro’s unprecedented rise against the Dollar will be cause for concern to policy makers as overseas demand dwindles and the economy slows.
Nevertheless, a spate of recent hawkish statements from a number of ECB officials has focused on higher inflationary concerns rather that the probable impact on the economy.
With oil prices rising towards $100 a barrel, producer price inflation will inevitably keep the ECB from lowering interest rates in the near-to-medium term.
The recent pattern of market movement has been compared to the volatility we saw in August where the Federal Reserve shocked the market by reducing the discount lending rate after raising borrowing costs aggressively over the past two years.
Two year bond yields fell below 3% yesterday to close at the lowest level in nearly 3-years as traders become increasingly concerned about the fate of the U.S economy.
The Dollar came under further pressure against both the Euro and the Pound yesterday following comments from the U.S Treasury Secretary, Hank Paulson, who said that home loan defaults should be substantially greater next year.
In terms of economic data, an index of leading economic indicators showed that the economy is forecast to slow significantly in 2008 as the Conference Board’s index fell 0.5% in October following a 0.1% gain the previous month.
Elsewhere, first time jobless claims and the Michigan sentiment survey were both better than expected but were both at levels consistent with slowing economic growth.
The Dollar may come under further pressure today as the Thanksgiving holiday leaves the U.S currency susceptible to further losses against most of the 16 most actively traded currencies.
The Pound unexpectedly performed very well against the majors yesterday, rising back above 2.0600 versus the Dollar and briefly trading above 1.4000 against the Euro as we build up to the release of the minutes from the Bank of England’s last policy meeting.
The overwhelming decline in Sterling sentiment has seen the UK currency fall to the lowest level in nearly three years versus the Euro amid increased speculation that the Central Bank will begin cutting interest rates next month in accordance with slowing economic growth.
The monetary policy committee collectively voted to hold interest rates steady at 5.75% this month and the report this morning will provide an insight into how the panel voted and the chances of a surprise rate cut in December.
The Pound may come under significant pressure if more than one policy maker has joined David Blanchflower in recommending a quarter-point reduction in the benchmark lending rate.
The governor of the Bank of England, Mervyn King, released the Bank’s quarterly inflation report last week where he seemed to be more concerned about growth in the economy than the upside risks to inflation and that may prove pivotal in the timing of the next move in UK interest rates.
The unrelenting rise of the Euro saw the single currency approach the coveted 1.5000 level versus the ailing U.S Dollar and this morning we have consolidated well under 1.4000 versus the Pound despite the lack of fundamental data released in the Euro-zone.
Traditionally, the U.S Thanksgiving Holiday is a quiet week in the market but the sharp volatility this year suggests that the Euro may indeed breach 1.5000 and rise to the strongest level on record.
In recent weeks the ECB have adopted a staunchly hawkish stance on monetary policy and have seemed unperturbed with the current strength of the Euro despite the likely impact on the economy.
However, comments from ECB official, Junker, does suggest that the Central Bank are starting to worry about the current exchange rate despite rising oil prices stoking the already persistent inflationary concerns.
The overwhelming and rapid decline of the Dollar saw the U.S currency make further losses versus the Euro yesterday and also trade lower against almost all of the 16 most actively traded currencies following reports that U.S housing starts fell to a 14-year low in October.
Home building permits slumped to the lowest level since 1993 while builders broke ground on a larger number of new homes that expected but the worst slump in housing for 17-years has yet to show signs of peaking.
Building permits fell 6.6% to an annual pace of 1.178 million, the fifth consecutive monthly decline, despite an unexpected jump in housing starts.
The focus yesterday inevitably fell on the FOMC minutes last night where Fed forecasts showed that risks to growth are skewed to the downside and therefore a further quarter-point rate cut may be necessary next month.
However, the U.S Dollar has continued to decline against the majors and the unrelenting weakness in the currency is causing concern amongst countries who hold Dollar denominated assets.
China and the Gulf nations have complained that their investments into U.S assets are falling while global inflation is rising and if the Dollar continues to lose value then there will come a point where the losses become intolerable.
The renewed weakness in the Pound continued yesterday as the UK currency declined against all but one of the 16 most actively traded currencies following reports that UK house prices dropped in every region of the country except London.
The average cost of a home dropped 0.7% this month and the report from Rightmove plc showed that sellers should continue to reduce prices because a more protracted slowdown is likely over the coming months.
UK home values have risen 7.9% from this stage last year, the smallest increase in 17-months, and the report coincides with a forecast from Nationwide Building Society last week that house prices will stagnate for the first time in a decade.
The governor of the Bank of England has also voiced concerns that there are signs the UK property market looks “particularly weak” after the MPC raised interest rates five times in a year and bank’s tightened lending.
Although the Pound continued to downward momentum against the Dollar yesterday, the daily losses are becoming limited and therefore a technical bounce is likely in the near-term, especially given the ’spike bottom’ on Friday.
The Pound traded as low as 2.0380 last week amid increased speculation of an impending rate cut by the Bank of England and deteriorating UK fundamentals.
The Euro rose to yet another record high versus the Dollar last night and also extended the gains made against the Pound amid hawkish commentary from ECB officials, including the chairman Jean-Claude Trichet, who insisted that the possibility of slowing growth is offset with the medium terms risks to price stability.
That sentiment will probably be echoed in a report this morning where German producer prices are expected to portray an upswing in factory-gate inflation.
The Dollar fell to the lowest level on record against the Euro yesterday and declined against all but three of the most actively traded currencies on speculation that U.S housing starts will show a deepening housing recession that threatens to curtail the pace of economic expansion.
Builders may have started work on just 1.17 million homes last month, down 1.8% from September and the lowest amount in 14-years as the construction slump shows few signs of abating.
Home sales throughout the U.S are dropping and potential buyers are waiting for values to fall even more while some institutions have tightened lending conditions in the wake of the crisis surrounding the U.S subprime mortgage market.
Sales of previously owned homes fell in September to the lowest level since records began in 1999 while new home sales plummeted to an 11-year low.
The report this afternoon may weigh heavily on Dollar sentiment and force the Federal Reserve to lower interest rates for the third month in a row in order to provide some relief to the housing market.
Therefore, the focus today will also fall on the minutes from the last FOMC rate announcement may policy makers may provide an indication of the probability of further monetary easing next month.
Following on from last week, the Pound extended its losses versus the majors on Friday, dropping back towards 2.0400 against the Dollar and consolidating under 1.4000 versus the Euro following a dismal report on UK consumer spending.
Retail sales unexpectedly declined for the first time in nine months in October as concerns over a renewed credit crunch coupled with higher interest rates dampened confidence.
Despite the jobless rate falling to the lowest level in almost 2-years, sales contracted 0.1% from the previous month amid higher food and fuel costs that will undoubtedly weigh on sentiment in the months ahead.
The report highlights the Bank of England’s concerns that downside risks to economic growth are becoming increasingly apparent and that has fuelled speculation of an imminent interest rate cut.
With the distinct lack of economic data released this week, sentiment towards riskier ‘high-yielding’ assets is likely to remain the dominate force in financial markets.
Following reports last week that Barclays plc had suffered huge losses related to the U.S subprime mortgage crisis, markets will be paying particular attention to any reports about the impact of the credit crunch.
The unrelenting upward momentum surrounding the Euro appears to be running out of steam as the single currency again failed to react to positive economic data and hawkish commentary from the European Central Bank.
The Euro has risen to the highest level on record against the U.S Dollar in recent weeks and also rallied to a fresh 2 1/2 year high versus the Pound as the ECB continued to stoke speculation of a further interest rate increase.
Recent reports of an upward swing in the annualised pace of inflation has seen the ECB take a staunchly hawkish stance on price stability while refusing to acknowledge the possible impact of a strong Euro.
However, with commodity prices rising to new record highs, a strong currency suits Europe but the likely impact on export growth will be cause for concern in the months ahead.
The recent appetite for the U.S Dollar may only be a result of broad Sterling weakness and not necessarily a reflection of the renewed optimism in the economy as reports last week showed that consumer prices remained unchanged while industrial production unexpectedly declined.
A decline in sales prompted factories to slow production with output dropping 0.5% in the month of October, the biggest fall since January as the biggest housing slump in 17-years begins to filter through to other industries.
The Federal Reserve have slashed interest rates by 75 basis points in just two months and the Dollar may come under further pressure amid renewed speculation of a further cut in December.
Renewed weakness in the housing market combined with fresh volatility in the financial sector may prompt policy makers to lower the benchmark lending rate and therefore the focus this week will fall on the minutes from the last FOMC meeting.
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