Following on from last week, the Pound declined heavily against the Euro, dropping 4.1% to yet another record low of 1.0470 and perilously close to parity amid another historic week for financial markets as the Federal Reserve cut U.S interest rates to a range between zero and 0.25% and investors speculated on the probability of the Bank of England following their example.
The UK currency also lost ground against the Dollar, slipping back under $1.5000 on Friday as UK unemployment rose in November at the fastest pace since 1991, while retail sales declined further and the minutes from the Bank of England’s last policy meeting showed that policy makers even considered a bigger reduction in December.
The increase in the UK jobless rate to the highest level since 1991 has further hampered Sterling sentiment with the claimant count surpassing the 1 million mark for the first time since 2001 as companies’ struggle to overcome the existing financial crisis and slash their workforce.
The monetary policy committee also voted unanimously to cut the borrowing costs to 2.0%, the lowest level since 1951, as the worsening economic climate caused a decline in tax revenue, while the UK budget deficit widened to a record level in November.
In addition, the Pound also cane under pressure as UK mortgage approvals fell 51% year-on-year last month and the language used in the minutes prompted speculation of another aggressive easing in rates next month as policy makers consider lowering borrowing costs to the lowest level in the Bank of England’s history.
The abysmal tone of recent UK economic data has illustrated the problems facing the beleaguered UK economy as the government attempts to spur lending and stimulate the economy that has been battered by the global credit crisis and thrust into the worst recession since the 1970s.
The BoE governor Mervyn King and the UK Chancellor Alistair Darling have both expressed the need to revive confidence in the banking system and spur consumer spending but a collaboration of rate cuts and increased liquidity has failed to stimulate growth and the Bank of England may have to resort to a period of quantitative easing to boost growth.
However, a report from the Office of National Statistics on Friday showed that UK retail sales unexpectedly increased in the three months through November as higher food demand for the Christmas period offset declines elsewhere with sales increasing 0.3% on the month after previously falling by the same amount in October.
In addition, a separate report showed that UK consumer confidence improved in December as the cost of petrol prices retreated and the government cut value added tax to 15.0% in an effort to revive the economy by encouraging people to step up spending despite the risk of mass unemployment.
An index of sentiment unexpectedly rose in December as lower energy costs and discounted goods helped bolster sales even as the economy hurtled towards a recession and the cut in tax has helped boost large purchases.
The positive momentum surrounding the Euro saw the single currency rally to a record high against Sterling for nine days consecutively this month and also make strong gains versus the Dollar amid suggestions that the European Central Bank are nearing the end of their easing cycle and are not prepared to drop interest rates under 2.0%.
Nevertheless, ECB governing council member Miguel Angel Fernandez Ordonez said that the Central Bank may cut interest rates in January if inflation expectations were significantly less than 2.0% and his comments over the weekend contrast with the recent rhetoric from the chairman Jean-Claude Trichet who said there is a limit to how far policy makers can cut rates.
From a technical perspective, the Euro may rise to $1.5000 against the Dollar over the next month, extending its 10% advance well beyond the current levels according to a series of numbers known as the Fibonacci sequence.
The Dollar has weakened to the lowest level against the Euro since late September as the Fed opted to cut interest rates to near zero per cent in an unprecedented action to stimulate the economy and the U.S currency subsequently fell for the fourth consecutive week against the Euro as reduction reduced the allure of U.S assets as a haven.
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Today:
The last trading day for spot trades before Christmas
Further bad news on the Euro but US Dollar weakness
TorFX would like to wish all our listeners and readers a very Merry Christmas and a happy and prosperous New Year.
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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 plunged to yet another record low against the Euro yesterday, dropping to a low of 1.0703 versus the Euro, while also registering sharp losses versus a basket of currencies following reports that UK jobless claims rose in November at the fastest pace since 1991 and the BoE minutes increased speculation that interest rates will be cut to zero per cent over the coming months.
According to a report from the Office of National Statistics, the number of people out of work and claiming benefits rose 75,700 from October to 1.07 million, the highest level since July 2000, and unemployment will continue to rise sharply over the coming months as UK companies slash jobs amid the worst financial crisis in almost a century sends shockwaves through the market.
Manufacturing and service sector growth has contracted at the fastest pace in decades and companies affected by the worldwide economic slump and almost 30,000 jobs are under threat from the collapse of Woolworths Plc and MFI Retail Ltd after both retailers went into administration last month and has struggled to find buyers.
The Prime Minister Gordon Brown responded to the unemployment data by telling reporters that the government is prepared to do whatever is necessary in order to improve the labour market as business service companies are expected to cut a further 275,000 jobs over the next two years as the deepening and prolonged recession ravages the advertising and real estate industries.
The UK claimant count rose for a tenth consecutive month in November, the longest stretch of losses since the 16 months through June 2006, and the meteoric rise in claims was revised to 51,800 in October from 36,300 and the jobless rate was last above the 1 million mark in January 2001.
The UK economic boom over the past 16-years has well and truly ended as the economy contracts 0.5% in the revised figures for the third quarter and recent estimates from the Bank of England indicate that growth will shrink 1.3% in 2009 despite severe monetary easing and the government’s efforts to revive lending.
Gordon Brown’s handling of the credit crisis has drawn support and seen his party recover in the polls but the Labour party face the prospect of fighting the next election with unemployment approaching 3 million, a level last seen under John Major’s tenure as Prime Minister in the early 1990s, and that may encourage Brown to hold a general election before the deadline of June 2010.
The Pound also declined against the Dollar after rising to a high of $1.5618 the previous day following the Federal Reserve’s unprecedented decision to cut U.S interest rates to between zero and 0.25% but the focus yesterday fell squarely on the release of the minutes from the Bank of England’s last policy setting meeting.
Policy makers lowered interest rates to just 2.0% in December, the lowest level since 1951, and the report yesterday showed that the nine-strong monetary policy committee voted unanimously to cut rates this month, while the accompanying statement indicated that a more aggressive action was considered, which would have brought borrowing costs to the lowest level since the Bank’s foundation in 1694.
The chairman of the Bank of England, Mervyn King, said that a larger cut “might be justified by the scale of the downside risks to inflation” and the Pound subsequently declined to yet another record low versus the Euro amid speculation that UK interest rates will be cut to 1.0% in the first quarter of next year.
The monumental decline in Sterling sentiment shows few signs of abating as investors speculate on the possibility of parity with the Euro but the minutes yesterday also highlighted that the depreciation of the Pound “should act to support next export growth” and policy makers are actively talking down the UK currency with the hope that a weaker Pound will attract overseas demand in UK exports.
However, manufacturing only accounts for roughly 14% of UK gross domestic product and the worsening economic climate means that companies are scaling back their workforce and factory production, while the worldwide slump is unlikely to boost demand from abroad in the near-term.
The Pound fell as much as 3.5% against the Euro yesterday and the UK currency looks ‘oversold’ to a degree, the pace of the decline is showing very few signs of subsiding as investors look at the aggressive actions of the U.S Federal Reserve early this week and believe the Bank of England will follow.
The Pound also came under renewed selling pressure versus the Dollar, dropping 0.9% on the session, as the abysmal tone of UK fundamentals and the increasing prospect of another large cut in borrowing costs continues to weigh on sentiment and will probably push the Pound even lower before the turn of the year.
A former member of the MPC, Charles Goodhart, said yesterday that Mervyn King should exercise “aggressive” policies to combat the economic slump and also urged the governor to approach next year with “courage and flexibility” to do whatever is necessary in bringing the economy of the worst recession since the 1970s.
It could be argued that the recent trend means that the Pound is more at risk among the major currencies as the ongoing financial crisis forces central banks globally to follow the Fed’s dramatic example but the European Central Bank have publicly expressed unwillingness to drop the benchmark rate lower than 2.0% as the monetary easing cycle draws to a premature end.
The Euro is rallying strongly against the Dollar and the incredible appreciation versus the Pound is showing few signs of peaking as Europe’s inflation rate fell the most in almost twenty years last month as oil prices continued to plummet and provided the ECB with further scope to cut interest rates beyond the current 2.5%.
The President of the Central Bank, Jean-Claude Trichet, said yesterday that there is a limit to how far the ECB are prepared to cut interest rates even as the recession takes hold and inflationary pressures moderate from 3.2% in October to just 2.1% last month, the biggest monthly drop since records began in 1991.
The sustained drop in commodity prices and a deteriorating economic climate raised concerns about the emergence of deflation but the ECB has seemingly discounted that threat, saying that a slowing of price increases is more likely rather than a period of declines.
The Dollar traded close to the lowest level in 13-years versus the Yen yesterday, while the U.S currency also slumped to the weakest versus the Euro since September as the Fed’s decision to cut interest rates to between zero and 0.25% reduces the appeal of holding U.S assets.
The greenback also plunged against a basket of currencies and surprisingly failed to take advantage of broad Sterling weakness as long-term treasury yields fell and U.S stocks declined amid speculation that the Fed is running out room to cut interest rates and may have to begin a period of quantitative easing as a last resort to stimulate the economy.
The Pound resumed its downward momentum against the Euro yesterday, dropping to a fresh record low at 1.1056, while the UK currency took advantage of broad Dollar weakness and rallied to a high of 1.5608 last night after an unprecedented announcement from the U.S Federal Reserve.
The FOMC slashed the main U.S interest rate to a range between zero and 0.25% and said it will do whatever is necessary to bring the economy out of its current slump, warding off fears of a Depression, and reviving credit in an effort to boost stability and spur lending.
In the accompanying statement, policy makers said that they will “employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability” and the Dollar subsequently declined as the cut was greater than anticipated.
The tone of the statement was almost designed specifically to increase an element of risk aversion in the market that encouraged investors to sell safe haven assets in favour of high-yielding currencies and the Dollar has endured the biggest two-day decline against the Euro on record.
Treasuries also rallied as the FOMC added that “the focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations”. The market rallied in anticipation that the Fed will continue to buy mortgage-backed securities in an attempt to force borrowing costs for consumers lower.
Policy makers have now lowered U.S interest rates on nine occasions in little over a year but together with the injection of $1.4 trillion in emergency lending, have so far failed to slow the economic downturn that is leading to the worst recession in a quarter of century and record low borrowings costs.
The key points of the Fed’s statement last night were designed to improve stability in financial markets and weaken the Dollar to boost export demand but the committee also noted that it will purchase agency debt and is ready to expand the program in considering the potential benefits of buying long-term Treasury securities.
The historic decision from the Federal Reserve could lead to a period of quantitative easing as policy makers send an extraordinary message that it is prepared to pump money into the financial sector until the economic downturn is reversed.
In the aftermath of the announcement, the U.S Treasury Secretary Henry Paulson addressed the delay over the projected $14 billion stimulus package to save struggling automakers General Motors Corp and Chrysler LLC and he said that officials were working on the terms of the bailout.
The renewed optimism sweeping through financial markets has curtailed the Dollar’s upside momentum against the majors and the magnitude of the decline last night took the U.S currency above $1.5600 versus the Pound and 1.4147 against the Euro.
The Pound slumped to yet another record low against the Euro and after a brief period of consolidation, the downside move is gathering in momentum and found fresh impetus yesterday after a government report showed that UK inflation fell in November to the lowest level since June.
Falling oil prices and a worsening economic climate has tightened its grip on the economy as consumer prices rose 4.1% from this stage in 2007, compared with 4.5% in October and the result means that the BoE governor Mervyn King had to publish another letter of explanation to the Treasury, explaining why the rate still exceeds the 3% upper limit.
In a letter to the Chancellor of the Exchequer Alistair Darling, King said that Britain’s inflation rate may fall next year to the lowest level since 2002, indicating that policy makers will continue cutting interest rates in the first quarter in attempt to stimulate the economy.
The UK inflation rate may fall below 1% in 2009 and King also emphasised that consumer prices may undershoot the government’s 2.0% target as policy makers will have to deal with a new threat of deflation.
The Pound subsequently declined against the Euro amid increased speculation that the Bank of England will need to cut interest rates from the current 2.0% in January, already at the lowest level since 1951, and Mervyn King has refused to rule out the possibility of deflation next year or cutting borrowing costs to zero per cent.
The Pound has declined over 20% in value against the Euro this year and almost 25% versus the Dollar, which has helped ease price pressures in the UK, while commodities have also tumbled with oil prices plunging 60% since reaching a record level in July.
The annual pace of inflation peaked at 5.2% in September and has exceeded the government’s 2.0% target for 14-months but falling petrol prices have helped, while shops bring forward sales to lure consumers that are concerned that they may lose their jobs.
The UK economy has fallen into a recession in the third quarter as tighter lending conditions rationed credit, while house prices plunged at the fastest pace since 1978 as the government’s attempts to stimulate spending with a £50 billion rescue package has so far failed to revive credit.
The Pound slumped to yet another record low against the Euro yesterday before bouncing back towards the end of the session as the UK currency snapped five days of declines versus its European counterpart as investors judged that the losses over the past week were excessive.
The Pound tumbled in early trade as the Conservative leader David Cameron said that he opposed a government intervention to improve the UK currency and said that “the fall in sterling against other currencies is the market saying your recession is going to be deeper and your debt that you have to raise in the markets is going to be higher”.
Cameron was a political adviser to the then Chancellor of the Exchequer Norman Lamont who presided over the Pound’s exit from the European Exchange Rate Mechanism in 1992 in an event that become known as “Black Wednesday”.
The somewhat surprising bounce in Sterling came after its 14-day relative strength index, a technical chart used by traders to predict currency movement, fell to a reading of 27.7 and a level below 30 indicates that a revival may be imminent.
The Pound also rallied after reaching a level that would have been equivalent to a record low versus the Deutsche Mark and it could be argued that the downside momentum had reached a significant support level and had to consolidate following an aggressive move over the past week.
The short-term revival in Sterling sentiment also saw the UK currency rally significantly against the Dollar, despite reports that house prices declined further in December and may drop an additional 10% in 2009 as the economy struggles to cope with the worst recession since the 1970s.
The average asking price for a home fell 2.3% from the previous data in November to an average £217,808, according to a report from Rightmove Plc, and the accompanying statement also indicated that rising unemployment will extend the slump in the UK property market over the next year.
The restricted lending conditions due to the financial crisis means that mortgage approvals have fallen to near record lows in recent months, threatening to exacerbate the economic downturn and help push home sales to the lowest level since records began in 1978.
Elsewhere, Barclays Plc CEO John Varley predicted that UK home values may decline by as much as 15% in 2009 as the recession ravages the advertising and real estate industries but the aggressive cut in borrowing costs in accordance with a government rescue package for UK banks is expected to improve sentiment.
The UK Treasury announced yesterday that it will cut the fee it will charge banks to underwrite £250 billion in guarantees in the another measure to help unfreeze credit markets and help stimulate the economy.
Bank’s are beginning to pass on the recent aggressive cut in UK interest rates after the BoE slashed borrowing costs to the lowest level since 1951 in December, while the recapitalisation of UK banks will inevitably free up credit.
In addition, reports this week are expected to confirm that the claimant count breached the 1 million mark for the first time since 2001 and a separate report yesterday from the Centre for Economic and Business Research said that UK business services companies will slash 270,000 jobs over the next two years.
UK stocks teetered between gains and losses yesterday amid reports that HSBC Holdings Plc fell as Europe’s largest bank confirmed that it has about $1 billion at stake in the collapsed Bernard Madoff venture, who allegedly lured some of the world’s biggest institutions into investments where gains were paid using money from new investors.
The Euro pulled back earlier losses to stand relatively unchanged against the Pound last night, while the single currency also rallied to a two month high versus the struggling Dollar amid speculation that the FOMC will cut U.S interest rates to 0.50% this evening.
The U.S currency is also approaching a 13-year low versus the Yen and declined to $1.5378 at one point versus the Pound as a report from the Federal Reserve showed that manufacturing in the New York state collapsed and contracted in December at the fastest pace on record.
The tone of the report will only reinforce support for another reduction in U.S interest rates, while the government dithers over the terms of a possible rescue package for struggling U.S automakers and the Dollar may come under renewed selling pressure as we build up to the announcement this evening.
The Dollar has declined for a second consecutive day against the Pound as the decline was exacerbated by reports from the U.S Treasury that international demand for long-term U.S financial assets weakened in October as overseas investors sold U.S stocks and corporate bonds.
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Today:
Luke Trevail returns but with more bad news for Euro buyers
Appetite for higher yield currencies sees the Pound strengthen against the US Dollar
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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 slumped to a record low against the Euro for five consecutive days last week, dropping under 1.1200 on Friday, after HBOS Plc said that bad loans will keep rising as credit conditions deteriorate, signalling that the Bank of England may need to continue to the pace of monetary easing in January.
The UK currency has come under serious pressure against the majority of the 16 most actively traded currencies as a host of weakening UK fundamentals indicate that the economic slump is intensifying and the government is fighting the worst recession since the 1970s.
Nevertheless, the Pound did rally to a high of $1.5117 against the Dollar as an element of risk appetite crept back into the market following suggestions that the U.S government were poised to rescue struggling automakers with a $14 billion stimulus package.
However, the Senate rejected the proposal on Thursday evening and the Pound subsequently weakened against the Dollar as global stocks tumbled and demand for riskier assets evaporated amid speculation that General Motors Corp and Chrysler LLC will be forced into Chapter 11 bankruptcy if an agreement isn’t reached.
The correlation between falling stock markets and a declining Pound has been increasingly prevalent in recent weeks but the news from HBOS Plc on Friday undermined Sterling sentiment amid speculation that UK interest rates could be cut to zero per cent.
The FTSE 100 Index lost 2.6% on Friday and the Pound depreciated 1.3% to the lowest level since the Euro’s introduction in 1999 as policy makers try to limit the fallout from the global credit crisis but interest rates can only be cut so far before the government has to look at less conventional techniques to revive the economy.
The accompanying statement from HBOS Plc, which agreed to a takeover by Lloyds TSB Group Plc, said that this year’s charge for bad loans rose to £5 billion as the credit crisis deepened and investors are still looking for further downside movement for the Pound against the Euro as we approach year-end.
In terms of economic data, the focus this week will fall on the tone of the minutes from the Bank of England’s last policy meeting where the MPC elected to cut interest rates to just 2.0% in an effort to improve lending conditions.
The nine-strong monetary policy, including the governor Mervyn King, are expected to have voted unanimously for the cut but investors will also be monitoring the tone of the statement for insights into how aggressive the BoE is prepared to be in terms of policy adjustment.
A number of committee members, including Andrew Sentence last week, have refused to rule out the possibility of cutting borrowing costs to zero per cent and the minutes could potentially exacerbate the Pound’s decline as the UK currency continues edging closer towards 1.1000 versus the Euro.
Elsewhere, the UK consumer price index for November will probably confirm another sharp deceleration in the annual inflation rate to 3.9% from 4.5% the previous month amid falling commodity prices that has seen oil lose over two thirds in value since the July high of $147.27 a barrel .
In addition, the dismal pattern of weak economic data will also weigh on the Pound as a government report will probably show a further drop in retail sales over the past month, while November unemployment is expected to push the claimant count above the 1 million mark for the first since early 2001.
The Euro has been gathering in momentum over the past week as the diverging interest rate expectations between the ECB and the Bank of England makes the single currency an increasingly more attractive commodity to investors.
A number of ECB governing council members have publicly expressed concerns on dropping interest rates below 2.0% after another aggressive 50 basis points reduction early this month to 2.5%.
Recent reports have indicated that the recession in the Euro-zone is deepening as a number of key industries slip further into contraction but policy maker Axel Weber said on Thursday that he would prefer to avoid taking the base rate below 2.0%.
However, at the same time Portugal’s finance minister Vitor Constancio said that the ECB still have a “margin of manoeuvre” to fight the risk of deflation and the council appears split on whether to resume monetary easing into the New Year.
While investors speculate on the prospect of another 1% percentage point cut by the Bank of England in January, the Pound is likely to decline further against the Euro amid speculation that the ECB is nearing the bottom of its easing cycle.
The Dollar bounced back against the majors on Friday and a 13-year low versus the Japanese Yen amid speculation that the Bush administration will utilise funds that were previously intended for financial institutions to bailout GM Corp and Chrysler LLC.
General Motors moved a step closer to a possible government rescue on Friday as the government said it may tap into the bank bailout fund after the Senate rejected a $14 billion stimulus package to ward off bankruptcy.
GM Chief Executive Officer Rick Wagoner has apparently been in discussions with senior White House officials, including the Treasury Secretary Henry Paulson, regarding a short-term plan to keep the struggling automaker solvent.
While Congress dithers over the terms of the projected bailout that was rejected by a majority on Thursday, the looming threat of a bankruptcy at the automakers may send the U.S economy into chaos within weeks, if it led to a shutdown at the companies.
Economists warned on Friday that automakers would close plants, lay off tens of thousands of workers and dramatically cut production that would cause many of their suppliers to collapse and trigger more job losses on a worldwide scale.
The Dollar remains very sensitive to the reports around the struggling U.S automakers and that trend will probably continue this week, while the focus switches to Tuesday’s FOMC rate announcement and the Federal Reserve are expected to cut interest rates to 0.50% as policy makers run out of room for further reductions.
The new shorter, more frequent, Foreign Exchange Outlook Podcast, brought to you by TorFX.
Today:
Another All Time Low Against the Euro
The US Dollar goes above 1.50… albeit briefly
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 declining sentiment surrounding the UK economy sent the Pound crashing to yet another record low against the Euro on Thursday as the UK currency plunged to 1.1230 on the session after an index of manufacturers’ output expectations matched the lowest level in almost 30-years.
The Pound has now fallen to the lowest level against the Euro on four separate occasions this week amid a barrage of weakening economic fundamentals that have strengthened the case for a further reduction in UK interest rates, while the Bank of England and the Treasury calculate the benefits of less conventional techniques to boost growth.
The report from the Confederation of British industry showed that factory orders for the next quarter remained at a reading of minus 43, the lowest level since 1980, as the UK economy slips further into its first recession in 17-years and the Pound lost a further 1.2% in value against the strengthening Euro.
Elsewhere, a separate report from the Bank of England showed that UK consumer price expectations for the next year fell by the most since records began in 1999 as the recession intensified and oil prices lost over a third in value since July.
The median forecast on increases in consumer price inflation fell to 2.8%, compared with just 4.4% in August, and the Bank of England must now avert the risk of deflation as the economy sinks into possibly the worst recession since the 1970s, according to BoE policy maker Andrew Sentence.
The significant drop in consumer price expectations will provide further scope for the Bank of England to reduce interest rates beyond the current 2.0% and the Pound is struggling amid speculation that policy makers will enact another sharp cut in January, to possibly to the lowest level in the Central Bank’s history.
The main objective for the government and BoE policy makers is to encourage banks to loosen credit conditions and revive consumer spending that would help boost services and stimulate the economy.
Woolworths Group Plc started a closing down sale yesterday as the owner of 815 UK stores failed to attract a rescue bid that would save more than 25,000 jobs in what will represent the largest collapse of a UK retail chain on record.
The intense speculation surrounding the prospect of zero per cent interest rates in the UK will continue to undermine Sterling sentiment over the coming months and only some evidence of a recovery in UK fundamentals will prevent the Pound from plummeting further against the Euro.
Nevertheless, UK stocks rallied yesterday as the FTSE 100 Index climbed to a one-month high on the session, led by energy companies, as crude oil prices surged 10% higher after the Saudi Arabian oil minister said he had delivered the massive output cuts promised to OPEC, a sign that supplies are smaller than initially anticipated.
The Euro is gathering in momentum against the majors as the single currency continued to rally higher versus the Dollar despite speculation that the German economy will contract 2.2% in 2009 after a report from the Munich based Ifo institute predicted the worst recession since the end of the Second World War.
The economic slump will continue into 2010 as declining tax revenue and bigger government spending on unemployment benefits will push Germany’s budget deficit to 1.4% of gross domestic product in 2009 and 2.9% the following year.
This latest forecast from the Ifo adds to recent evidence that the German economy is facing its deepest economic slump since returning to democracy in 1949 and that will increase pressure on Chancellor Angela Merkel to play a more active role in stimulating growth and encourage the ECB to continue the pace of monetary easing.
However, the Euro has found support this week as policy makers shy away from committing to another rate reduction in January as governing council member Axel Weber warned against reducing borrowing costs below 2.0%, suggesting that the Central Bank may be close to the end of its rate-cutting cycle.
Just a week after slashing interest rates by 75 basis points to the lowest level in its history, the ECB have expressed little appetite in following the Federal Reserve and Bank of England in continuing an aggressive easing in monetary policy and that may propel the Euro higher over the coming weeks.
The Dollar has been under increasing pressure against majors this week and the U.S currency may extend its decline in the near-term after the cost of borrowing dollars tumbled and indicated weakening demand for year-end funding.
The Dollar fell to the lowest level in seven weeks against the resurgent Euro yesterday as a separate government report showed that the U.S trade deficit unexpectedly widened in the latest figures for October after exports slid to a seven month low, while the number of Americans filing for unemployment claims surged to the highest level since 1982.
The aggressive swings in risk sentiment is also driving the Dollar lower as discussions on a U.S automaker bailout reaches the Senate and politicians negotiate a tentative compromise on a $14 billion rescue package that will probably be rejected and that may revive Dollar sentiment as an element of risk aversion creeps into the market.
The Pound slumped to yet another record low against the Euro yesterday, falling to 1.1338 on the session following another round of worsening economic data that showed the UK economy may contract at the fastest pace in 18-years during the fourth quarter.
The report from the National Institute for Economic and Social Research illustrated the problems facing the Bank of England as UK gross domestic product fell 1% in the three months through November and will probably plunge further over the coming months, according to the accompanying statement.
The NEISR said that the data confirms that the rate of output in the UK is deteriorating and the statement also emphasised recent comments from the Chancellor of the Exchequer Alistair Darling in that the main objective is to loosen the availability of bank credit and spur lending.
Nevertheless, the statement also highlighted that “further interest rate reductions are unlikely to have much effect” despite policy makers lowering the bench mark lending rate to 2.0% this month and the government may have to utilise less conventional techniques of stimulating the economy.
BoE policy maker Andrew sentence added to the gloomy outlook for UK economic growth yesterday as he told reporters that the recession will probably be as deep and prolonged as any since the 1970s despite the government’s plans to cut taxes and pledge £50 billion in a bank rescue that has thus far failed to stop the decline.
UK interest rates are currently at the lowest level since 1951 but some major banks have refused to pass on the full extent of the cuts as an element of panic still stalks the banking system, which is still reeling from the worst financial crisis since the Great Depression.
Lenders have passed on less than half of the 150 basis points cut in November and the Bank of England followed up with another one percentage point reduction this month but it is unlikely to revive the ailing UK property market as prices slip to the lowest level since 1978.
The UK currency also fell to its weakest level on record against the currencies of its major trading partners and from a technical perspective the trend appears to be down as the Pound slumps to record lows versus Euro on an almost daily basis.
The recent pattern between stock market movement and currencies has been increasingly prevalent in recent weeks but a two-day rally in global stocks has failed to boost sentiment as the Pound is now considered a weaker asset that the strengthening Euro.
The Bank of England and the government will together recognise the benefits of a weaker Pound in bolstering the economy but officials are risking a run on the UK currency as slowing global demand and shrinking factory production means that exports are unlikely to stimulate growth.
However, the Pound bucked the trend of declines by rising to a high of 1.4880 versus the U.S Dollar amid an increase in risk appetite following reports that the UK government is considering pumping billions of Pounds into the economy in an unprecedented move to halt the recession.
The Bank of England and the Treasury are discussing the possibility of a strategy known as ‘quantitative easing’ where officials increase money supply into the economy to bolster bank reserves and therefore unlock lending restrictions in a final attempt to bring the economy out of the current slump.
The positive momentum surrounding the Euro shows few signs of slowing as the single currency also breached above $1.3000 versus the Dollar after ECB Executive Board member Juergen Stark admitted that any further rate cuts would be “small” as the Central Bank runs out of room for further easing.
ECB policy makers elected to respond the financial crisis and lower the benchmark lending rate to 2.5% last week and to the lowest level in its history as the U.S led global recession spreads to Europe.
Stark’s comments seem to indicate that the Central Bank will adopt a wait and see policy over the next month and look to re-assess the outlook for price stability before any decision is taken on a further reduction in January.
Investors were lured away from safe haven currencies like the Dollar and the Yen amid separate reports that U.S lawmakers are prepared to take a vote on a $15 billion automotive bailout that could face strong resistance within the Senate.
General Motors Corp, Chrysler LLC and Ford Motor Co are struggling to ward of bankruptcy as shares in the automakers slumped again in New York yesterday but the Republicans plans to appoint a so called ‘car czar’ may result in a similar fate unless the companies can come up with a restructuring plan by March 31st.
The Dollar may continue to struggle against the majors today as the U.S government increases its budget deficit by spending an unprecedented amount of money in yet another attempt to bolster the economy and Dollar buyers would be well placed to monitor the current trend or consider a stop order to protect against further weakness.
by Adam Solomon
Sterling / Euro and US Dollar
The Pound made significant gains against a basket of currencies yesterday, rising through $1.56 against the Dollar to the highest level in five-months, while the UK currency also re-visited the resistance level at 1.20 versus the Euro. The Australian Dollar has declined heavily against the Pound and U.S... Read more
Daily Exchange Rate Forecast – July 28th
by Adam Solomon
Sterling / Euro and US Dollar
The Pound rallied to a fresh five-month high against the U.S Dollar this morning, while the UK currency also made strong gains versus the majority of the 16 most actively traded currencies. Sterling hit a high of 1.5575 in London, as global risk appetite continues to improve, diminishing... Read more
Turkish Lira Exchange Rate Forecast
by Jon Beddell
Foreign Currency Market Update – GBP / TRY Update
The much awaited European bank stress tests were completed on Friday. All major banks passed the tests including the four major UK banks that took part. Also giving the pound a boost on Friday was a strong second quarter GDP figure. Growth... Read more
New Zealand Dollar Exchange Rate Forecast
by Jon Beddell
Foreign Currency Market Update – GBP / NZD Update
The pound bounced by seven cents from July 13th to July 19th, but gave back those gains last week, making a new four week low on Thursday even as UK retail sales data for June beat expectations. Things looked a little better on Friday.... Read more
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