Market News

The Pound rallied for a third consecutive day against the Dollar yesterday, while the UK currency also climbed above 1.0800 versus the Euro as renewed optimism for banking stocks swept through the market after Citigroup Inc recommended buying Lloyds Group Plc shares and eased concerns about the government’s role in rescuing lenders.

Despite the dire tone of recent housing number and reports from the International Monetary Fund that the UK economy is the most susceptible to the global crisis, the Pound rose to its highest level against the Dollar in more than a month amid a renewed appetite for risk as the UK FTSE 100 index gained 13% on the day.

Shares in Barclays Plc have rallied another 31% in London trading today after a statement earlier this week said that the struggling bank won’t need any further capital increases because revenue increased substantially last year following the acquisition of assets from the collapse of Lehman Brothers Holdings Inc.

The statement from Citigroup Inc also highlighted that the prospect of nationalisation of UK banks has been “exaggerated”, while billionaire investor George Soros also said yesterday that he is no longer betting on the Pound’s decline and that provides some optimism that the UK currency may have reached a near-term bottom.

At the World Economic Forum in Davos, Switzerland Soros said that he foresaw the fall in Sterling last week but below $1.4000, the risk-reward ratio was no longer clear as the Pound dropped to a low of $1.3505, the lowest level since 1985.

The correlation between stock market volatility and the Pound’s performance against the majors has become increasingly prevalent in the recent weeks and the UK currency strengthened 1.4% against the Dollar to a high of 1.4375 before the FOMC rate announcement last night.

The Pound also appreciated 0.8% against the Euro despite reports from the IMF that the UK economy will contract 2.8% in 2009, more than any of the other Group of Seven industrialised nations, while the global slump will continue this year as more than $2 trillion of bad U.S assets will continue to curtail the pace of economic growth.

The statement from the International Monetary Fund is in stark contrast to recent comments from the UK Prime Minister Gordon Brown who has maintained throughout this crisis that Britain is in a better position to deal with the slump but his efforts to stabilise the economy were met with cynicism by the opposition leader David Cameron yesterday.

Brown conceded yesterday that the UK is entering a “deeper recession” than first feared and declared that the government will act to soften the effect, suggesting that he may consider yet another fiscal stimulus package as previous injections of capital and the most aggressive policy easing in history has done little to raise sentiment.

The Bank of England are likely to buy assets and print money within the next six months as the UK Treasury works to rescue the economy that has been ravaged by possibly the worst recession since the end of the Second World War, while the Chancellor Alistair Darling may add to the £20 billion stimulus program of tax cuts and spending increases.

The Euro declined against both the Pound and the Dollar yesterday despite a statement from the ECB President Jean-Claude Trichet said that the Central Bank’s next “important” meeting will be in March, suggesting that policy makers will refrain from cutting rates next month while the BoE look to cut by another projected 50 basis points.

The ECB’s governing council has been forced into the most aggressive period of monetary easing in its 10-year history after the global financial crisis pushed the Euro-zone economy into a deeper recession but Trichet has still signalled his reluctance to bring rates below the 2.0% ceiling and following the Fed in reducing borrowing costs to zero.

However, markets are still looking at the dire tone of European economic data and the dramatic fall in fundamentals is forcing policy makers to look at less conventional techniques to revive the economy with the German coalition introducing the biggest fiscal stimulus package since the end of World War Two.

The Central Bank’s reluctance to lower interest rates in February is hurting the Euro according to a report from the Royal Bank of Scotland Plc as the single currency fell 0.4% versus the Dollar amid suggestions that the Euro-zone are behind the curve in an economic recovery.

In terms of economic data, the ECB came under further pressure to continue the pace of monetary easing after Germany’s annual inflation rate unexpectedly dropped to a the lowest level in almost five-years in January after the harmonised index of consumer prices declined to 0.9% on the month.

The ECB currently has the highest interest rate among the Group of Seven nation as the Fed, the Bank of England and the Swiss Central Bank have cut rates by more as the world’s largest economies slide simultaneously into a recession for the first time in over 60-years.

The Dollar and the Yen weakened again against the majors yesterday, both dropping to a one-weel low versus the Euro amid speculation that the U.S plan to set up a bank to contain all toxic debt will reduce the demand for safe haven currencies and revive market sentiment.

The U.S House of Representatives is preparing today to approve Barack Obama’s historic $816 billion economic stimulus package aimed ay bringing the economy out a recession through a combination of tax cuts and a $604 billion spending bill that is designed to revive consumer spending.

Data Released 29th January

U.K 07:00 Nationwide House Prices (January)

GER 09:00 Unemployment Rate (January)

EU 09:00 M3 / 3 Month Moving Average (December)

EU 10:00 EC Business Climate Index (January)

EU 10:00 EC Economic Sentiment (January)

- Consumer / Industrial / Services

U.S 13:30 Durable Goods (December)

U.S 13:30 Jobless Claims (w/e 24th January)

U.S 15:00 New Home Sales (December)

written by Adam Solomon

The Pound rallied against the Euro for the first time in seven days yesterday, while the UK currency also continued the surprising upside momentum versus the Dollar, rising to a high of $1.4240 in London, as concerns eased about the amount of money required to bailout UK banks.

The slump in banking stocks has increased speculation that the government will move to nationalise Barclays Plc and Royal Bank of Scotland Plc but the Pound rallied form a three week low as UK banking stocks gained for a second day yesterday and the cost of protecting their bonds from defaults fell.

Shares in Barclays Plc rallied by the most in twenty years on Monday and a statement from the bank’s CEO on Tuesday said that it won’t need funding from the government because revenue increased exponentially from the North American acquisitions of Lehman Brothers Holdings Inc.

There is a strong correlation at present between the Pound’s performance and banking sentiment and the revival in share prices has seen the UK currency rally from a three month low versus the Euro and peak above $1.4300 versus the Dollar this morning but the tentative swings in risk could see Sterling come under renewed selling pressure over the coming days.

Therefore, it would be quite prudent for Euro and Dollar buyers to consider placing a stop order in the market to protect against an adverse retracement back towards the support at $1.3505 versus the Dollar and 1.0580 against the Euro, particularly considering the tone of UK housing data released this week.

The Euro continued to make gains against the Dollar yesterday as the renewed appetite for risk reduced the U.S currency’s appeal as a haven, while the single currency also benefited from an unexpected upturn in German business confidence as the Ifo index of investor and analyst expectations rose for the first time eight months.

The European Central Bank’s decision to cut interest rates aggressively since October has boosted sentiment, while the German government doubled its economic stimulus package to fight the recession that has ravaged the economy following the worst financial crisis since the Great Depression.

Chancellor Angela Merkel’s coalition agreed this month to input in the region of €80 billion over the next two years in another attempt to halt the worst economic slump since the end of the Second World War as the International Monetary Fund expects the German economy to contract 2.5% in 2009.

The government’s spending package will amount to roughly 1.6% of Euro-zone gross domestic product, the biggest stimulus package in European history, and business confidence has improved as commodity prices continue to tumble with oil dropping 70% in value from the July peak of $147.27 a barrel.

Nevertheless, the surprising increase in the Ifo sentiment index at least provides some optimism but it doesn’t necessarily mean that the worst is over and the economic outlook for the Euro-zone remains for the economy to shrink in the first and second quarters of 2009 with a possible recovery in the third.

The ECB’s governing council has cut interest rates to equal a record low of 2.0% on four occasions since October and earlier this month the chairman, Jean Claude Trichet, signalled another likely reduction in March but the Bundesbank president and staunch hawk Axel Weber has reiterated his reluctance to cut below the 2.0% ceiling.

Weber also said yesterday that he expects the recession in Germany to precede a period of stabilization after the first quarter with an economic revival in 2010 and his comments will support the Euro and increase speculation that the Central Bank is nearing the end of its rate cutting cycle.

The rising appetite for risk continued to weigh on the Dollar yesterday but the U.S currency reversed earlier losses in New York after a report showed that consumer confidence unexpectedly declined to a record low in January, increasing the appeal of the Dollar as a relative safe haven currency.

By the close of trading last night, the Dollar had bounced from a one week low against the Euro to stand 0.2% higher on the day as the Conference Board’s index of confidence fell to a reading of 37.7, from a revised 38.6 in December as companies continue to shed workers as sales plummet.

Caterpillar Inc and Home Depot Inc were among several companies this week who said that they will cut at least 74,000 workers from payrolls over the coming months and President Barack Obama is trying to increase support for a quick passage of an unprecedented stimulus plan aimed at creating jobs, cutting taxes and boosting infrastructure spending.

The focus today will fall on the FOMC interest rate announcement this evening and policy makers are expected to maintain the target lending rate in a range between zero and 0.25% as the focus swtiches to the tone of the accompanying statement where the Central Bank may broaden the range of assets it will purchase to unfreeze credit markets.

Data Released 28th January

U.S 19:15 FOMC Rate Announcement

written by Adam Solomon

The Pound recovered some significant gains against the Dollar yesterday, rising from the lowest level since 1985 on Friday to peak just under $1.4000 during the European session amid reports that Barclays Plc won’t need any further capital increases despite fears of nationalisation.

Barclay’s share price rose 73% in London, the most in at least two decades, after the CEO John Varley said in an open letter that the North American units acquired from Lehman Brothers Holdings collapse are generating “record” revenue and yesterday’s statement helps allay the worst fears of diminishing capital.

The increase in risk appetite is normally associated with Dollar weakness and that trend continued yesterday but the Pound’s resolve is unlikely to continue as speculation persists that UK interest rates will be cut below 1% by the end of the first quarter.

The UK currency actually advanced 0.8% versus the Dollar as Barclays admitted yesterday that it wrote down another £8 billion and still has £17 billion more capital than required by regulators, while the increase in risk appetite also saw Sterling appreciate versus the Yen after falling to a record low on three consecutive days over the past week.

The Pound plummeted to a low of $1.3503 against the Dollar last week, the lowest level since September 1985, as the government’s plan for a second bank rescue package in three months raised concerns that the nation’s budget deficit will widen further, while investors met the plan with cynicism that the move would revive the ailing economy.

The UK Prime Minister Gordon Brown appeared to dodge questions on the Pound’s demise yesterday and avoided addressing the currency’s 23-year low against the Dollar despite mounting complaints from consumers, who are shunning the Labour Party in the latest polls.

The decline in Sterling has historically undermined previous Prime Ministers including John Major, James Callaghan, Harold Wilson and most notably Margaret Thatcher, who famously resigned over a dispute aligning with other European currencies in 1990.

Major’s tenure as Prime Minister came under fresh scrutiny when he allowed the Pound to be removed from the European exchange rate mechanism in 1992 and he subsequently lost the next General Election in 1997, while Thatcher saw the Pound’s strength as a symbol of Britain’s economic virility and was forced to resign over the matter.

The UK currency is struggling to stem the losses against the majors, dropping an unprecedented 7% in value over the past week alone as the worsening financial crisis caused a deeper recession than first feared, while the lowest interest rates in the Bank of England’s history has further exacerbated the decline.

From a technical perspective, the Pound could drop as low as $1.2800 versus the Dollar over the coming months after falling from a high of $2.11 in November 2007 to just $1.3505 on January 23rd after the government confirmed that the UK economy had slipped into a recession.

Elsewhere, the Pound breached below 1.0600 versus the Euro yesterday and the downside momentum may continue as Philip Shaw, chief economist at Investec Securities in London, said that the proximity of the UK currency to 1 Euro is “a big psychological level”.

Brown has continued to rebuff complaints about the Pound, branding the Conservatives irresponsible for trying to raise issue in November and largely ignored European Finance Ministers who urged him this month to intervene and prevent a run on the UK currency.

In terms of economic data, the Pound may be susceptible to the latest round of housing data as UK home prices posted the biggest annual decline since at least 2001 in January as the recession deepened and bank’s refused to lift lending restrictions that have seen the average cost of a home fall 9.4% in the past year.

According to the report from Hometrack Ltd, house prices fell to an average of £158,300 and Gordon Brown pledged last week to use “every weapon at our disposal” against a credit squeeze that has savaged the mortgage and housing market.

The Euro remains on the front foot versus the Pound while the single currency also rallied to a high of $1.3200 versus the Dollar after the German Chancellor Angela Merkel said that her coalition will borrow the biggest amount ever by a German government since the Second World War as it aims to halt the recession.

The Dollar was again susceptible to swings in risk sentiment and declined versus a basket of currencies after the rally in global stock markets reduced demand for safe haven assets, while the U.S currency failed to make gains despite an unexpected upturn in economic indicators.

Existing home sales surprisingly rose 6.5% to an annual rate of 4.74 million last month as the biggest slump in property prices since the Great Depression renewed buyer’s appetite for home purchases, while the Conference Board’s index of leading economic indicators increased 0.3% as the supply of money expanded.

Data Released 27th January

U.K 11:00 CBI Distributive Trades Survey (January)

EU 09:00 Current Account Balance (November)

GER 09:00 Ifo Index (January)

U.S 14:00 Case Shiller House Prices (November)

U.S 15:00 Consumer Confidence (January)

written by Adam Solomon

Following on from last week, the Pound posted its biggest weekly drop in three months against the majors after banking stocks plummeted and reports showed that the UK economy contracted by more than preliminary estimates in the fourth quarter to suggest that the recession is worsening.

The UK currency slumped to the lowest level against the Dollar since 1985, while the Pound also fell below 1.0600 versus the Euro, after the economy suffered its biggest contraction since 1980 and the BoE governor Mervyn King said last week that policy makers may begin buying ‘toxic’ assets within weeks.

The UK economy has now shrank for two consecutive quarters, the technical definition of a recession, and Mervyn King also conceded that the most aggressive easing in UK interest rates in history has failed to stimulate economic growth and the Central Bank will now how to look at quantitative easing measures to revive sentiment.

The fiscal and monetary measures highlight the severe problems facing the government and the Pound dropped as much as 2.7% to $1.3503 against the Dollar on Friday, the lowest level since September 1985, and the UK currency lost 7% in value against its U.S counterpart over the course of the week.

The Pound also lost another 4.4% in value against the Euro, a trend that may continue towards the end of January, amid speculation that the Bank of England will cut interest rates by another 50 basis points in February as gross domestic product fell 1.5% in the fourth quarter.

In terms of economic data, the Pound’s depreciation was further enhanced as UK unemployment climbed to the highest level in nine years with the number of people out of work and claiming jobless benefits rising by 77,900 to 1.16 million, the highest level since January 2000, while home repossessions almost doubled.

The UK banking system was within hours of collapse on October 10th, just days before the government announced a major rescue package, according to an article from City Minister Paul Myners in the Times Newspaper.

Major depositors tried to withdraw from a number of large banks and were willing to pay penalties for early withdrawals such was the pessimism surrounding the banking sector and Myners comments will only serve to exacerbate the problem as shares in Barclays Bank Plc and the Royal Bank of Scotland Plc plummeted last week.

It will be interesting to gauge the Pound’s reaction to the comments this weekend, while Bank of England policy David Blanchflower also added to the pessimistic outlook for the Pound as he said the UK interest rates should “obviously” be cut to the near-zero level to aid the economic recovery.

The minutes from the Bank’s last policy-setting meeting in January showed that Blanchflower was the only member of the nine-strong monetary policy committee to vote for a bigger 100 basis point reduction as the economy continues to contract and unemployment is expected to rise to 3 million in the next year.

The Euro took advantage of broad Sterling weakness last week, while the single currency has remained surprisingly resilient versus the U.S Dollar amid speculation that the ECB will refrain from cutting rates in February and the Bundesbank President Axel Weber said that the German economy will recover in the second half of the year.

Weber is a member of the ECB governing council and has previously expressed reluctance to cut interest rates below the Central Bank’s 2.0% ceiling even as economic data points to a worsening recession but the government’s bank rescue package is expected to stimulate the economy going into 2010.

There is a plethora of survey data released for January this week, including the EC’s sentiment reports and the German Ifo index and the Euro may come under some pressure as all are expected to remain at near-record low levels, reiterating the weak tone of the flash PMI’s earlier in the month.

The rising appetite for risk aversion and the feel good factor from President Barack Obama’s inauguration last week has helped drive the Dollar and the Yen higher despite reports that the worst credit crisis since the Great Depression has pushed the U.S economy into a recession.

Gross domestic product contracted at a 5.5% annual rate from October through to December, the biggest decline since 1982, as consumers and businesses retrenched but Congress are working to pass an economic stimulus plan worth $825 billion by mid February that may actually curtail the Dollar’s momentum.

According to Citigroup Inc, the U.S currency will decline as commodities rally and signal that the Federal Reserve may succeed in reviving the economy from the worst post war slump by pumping an unprecedented amount of money in the financial system.

The focus this week will fall on the accompanying statement from the Fed policy announcement, while the first estimate of economic growth in the fourth quarter will be of equal importance in setting the tone for the week as the economy is forecast to record the worst performance since the early 1990s.

Data Released 26th January

U.K 00:01 Hometrack House Prices (January)

U.S 15:00 Existing Home Sales (December)

U.S 15:00 Leading Indicators (December)

written by Adam Solomon

The Pound has traded to a record low against the Japanese Yen on three separate occasions this week, while the UK currency remained close to a 23-year low versus the Dollar and dropped under 1.0600 against the Euro amid speculation that the worsening economic climate will force the government to nationalise UK banks.

The escalating banking crisis and the re-introduction of short-selling to an already fragile market saw UK stocks plunge for a fourth straight day on earnings concerns but the extent of the decline in value of the Pound means that Britain may lose its AAA credit rating as the government increases borrowing exponentially.

The UK currency is clearly locked in a downward trend against the Dollar as the Pound traded close to the lowest level since 1985 as plummeting share prices of the country’s biggest banks sparks speculation that the government will take full control of the Royal Bank of Scotland Plc and Barclays Bank Plc.

The government’s second stimulus package in just three months has given the Bank of England unprecedented powers to begin buying toxic assets and the governor Mervyn King said this week that officials may start purchasing assets to bolster lending in the latest initiative to bring the economy out of the first recession in 17-years.

Nevertheless, the Pound fell almost 2% to a low of $1.3690 by the close of trading last night, while Sterling also declined for a fifth consecutive day against the Euro as the government’s plans were met with cynicism by investors who urged traders to dump Sterling in favour of more ‘secure’ assets.

Elsewhere, the negative sentiment surrounding the economy continued as UK home repossessions almost doubled in the third quarter, while business confidence plunged to the lowest level since 1980 as the economic slump gathered in momentum.

In terms of economic data, the Pound may struggle to recoup any gains against the majors today as the preliminary estimate for UK gross domestic product in the fourth quarter will probably show that the economy shrank by the most since 1990 as unemployment soared higher and banks reined in lending.

However, a lot of negative sentiment has already been built into the Pound’s current levels against the majors and economists at UBS AG and Goldman Sachs Group Inc have urged caution on any further downside moves on Sterling, “especially on the Euro axis” as the Pound may be poised to recover.

The extent of the Pound’s decline may mean that the furore surrounding the slump in the UK economy may be over exaggerated and the likelihood of a near-term improvement in business activity suggests that we could be poised for rally in the Pound, particularly as budget deficits in Europe escalate.

The Euro again took advantage of broad Sterling weakness yesterday and the single currency bounced back above $1.3000 versus the Dollar despite reports that European industrial orders fell by the most on record in November.

Orders in the Euro-zone declined 26% from this stage in 2008 to record the biggest drop since the Euro was introduced 10-years ago and the drop exceeded economists’ forecasts as the recession curtailed demand.

The decline in European fundamentals suggests that the region is being dragged through its deepest recession since the end of the Second World War as the shortage in credit weighs on consumer spending and the ECB will have little choice to cut interest rates again in March.

The Dollar came under renewed selling pressure towards the end of the European session yesterday, falling back towards $1.3880 versus the Pound, as the number of Americans filing for initial jobless claims for unemployment benefits matched the highest level in 26-years.

Claims increased by 62,000 to 589,000, more than initial forecasts, as employers cut 2.6 million jobs last year and may continue to shed its workforce, which will inevitably weigh on spending and push the economy into a deeper recession.

Data Released 23rd January

U.K 09:30 Preliminary Gross Domestic Product (Q4)

U.K 09:30 Retail Sales (December)

EU 09:00 Flash PMI – Composite (January)

- Manufacturing

- Services

written by Adam Solomon

The worsening economic climate saw the Pound plunge to the lowest level against the Dollar since Margaret Thatcher’s reign as UK Prime Minister, while the UK currency also dropped to another record low versus the Japanese Yen and sank towards 1.0600 against the Euro amid concerns that the government will nationalise UK banks.

The Pound slid against all of the 16 most actively traded currencies for a second day in succession after the governor of the Bank of England Mervyn King said in a speech that the Central Bank may start buying toxic assets within weeks after cutting interest rates to the lowest level in its history.

During his statement in Nottingham, King emphasised the need to loosen credit conditions and almost conceded that the Bank of England’s aggressive easing in monetary policy had failed to stimulate the economy from possibly the worst economic slump since the end of the Second World War.

The Bank of England have cut the UK benchmark interest rate by 350 basis points to a record low of 1.5% since October alone but that won’t prevent an economic meltdown in the first half of the year as shares plunge following the re-introduction of short-selling to the market.

The Pound had weakened on speculation that policy makers discussed the benefits of quantitative easing measures in the last meeting at the beginning of the month and King said yesterday that the BoE may acquire securities such as corporate bonds to revive lending to companies and consumers.

King also highlighted the risks that inflation may fall below 2.0% over the coming months after consumer prices plummeted to 3.1% year-on-year in December and said that “it is sensible for the Monetary Policy Committee to prepare for the possibility that it may need to move beyond the conventional instrument” of cutting interest rates.

In the speech, King set an agenda for monetary policy and backed the government’s plan to give unprecedented powers to the Bank of England, signalling more interest rate cuts to come, while the Central Bank may reach a point of using quantitative easing techniques to target inflation and in effect limit the risks of deflation.

UK stocks declined for a third consecutive day amid concerns that the recession will worsen, while UK economic data showed that unemployment rose at the second-fastest pace since 2001 and shares in Barclays Plc fell for a seventh straight day on speculation that it may be forced to take more writedowns and be nationalised.

Shares in the struggling bank slumped a further 35% in early trade but recovered to close down 9.3% on the session to just 66.1 pence a share and there is genuine fear among shareholders, who see an increasing risk of nationalisation.

The UK government has announced plans to guarantee toxic assets and has given the Bank of England the power to buy £50 billion of securities in a second bank bailout since October in the hope of reviving confidence in the banking system but Jon Mcfall, the chairman of the Treasury Committee, has urged more banks to be nationalised.

McFall, who leads a Parliament committee overseeing Treasury policy, is reported to be a political ally of Gordon Brown and he also urged the Financial Services Authority to reconsider its decision to lift the ban of short-selling UK bank stocks as shares in the country’s biggest banks continue to decline.

The share price for the Royal Bank of Scotland Plc has fallen 75% in the past four days trading alone, while shares in Barclays Plc have now halved in the same period, which coincides with the lift in the ban on short-selling that was imposed last September following the collapse of Lehman Brothers’.

The Pound also came under pressure following the release of the minutes from the Bank of England’s last policy-setting meeting where it was revealed that the MPC voted 8-1 in favour of a 50 basis point reduction in UK interest rates, while David Blanchflower was the sole voice for a greater 1% cut.

Elsewhere, UK jobless claims rose at the second fastest pace since 1991 in December as the worsening economic climate forced companies to shed jobs with the number of people out of work and claiming benefits rising 77,900 to 1.16 million and that represents the biggest increase since January 2000.

Although the claimant count wasn’t quite as bad as initially anticipated, the reports combined have put further downward pressure on Sterling as the UK currency slid 2.2% against the Dollar, falling under the major support level at $1.3682 and a significant breach of this level would indicate a further move towards $1.30.

Data Released 22nd January

EU 09:00 ECB Monthly Bulletin Published

EU 10:00 Industrial Orders (November)

U.K 11:00 CBI Monthly Industrial Trends (January)

U.S 13:30 Housing Starts (December)

U.S 13:30 Initial Jobless Claims (w/e 17th January)

written by Adam Solomon

The Pound plummeted against the majors yesterday, dropping under $1.4000 versus the Dollar for the first time since 2001, while the UK currency also declined heavily against the Euro and fell to a record low versus the Japanese Yen after the UK government’s second bank bailout in just three months.

The announcement from the UK Prime Minister Gordon Brown was met with widespread cynicism as investors encouraged traders to dump Sterling and the Pound subsequently recorded its biggest one-day drop against the Euro in a month amid concerns that the package won’t be sufficient in bringing the economy out of a recession.

The re-introduction of ‘short-selling’ on January 16th saw share prices in the banking sector fall to historic lows with the RBS Group Plc falling again yesterday following a 67% drop in the share price on Monday and the government also said that it will support the struggling bank, increasing its stake after the bailout in October.

The Royal Bank of Scotland took another step closer to full nationalisation yesterday as the Bank promised to make £6 billion available to UK borrowers but investors are sceptical on whether the UK government’s plans to inject another £50 billion into the banking system will make a dent in the worst financial crisis since the Great Depression.

The virtual collapse in the UK bank system has put an incredible amount of downside pressure on the Pound and the UK currency slid 4.4% against the resurgent Yen yesterday, while tumbling 3.6% against the Dollar to an intra-day low of $1.3863, the lowest level since June 2001.

The trend for the Pound versus the Dollar is clearly down and the feel good factor from Barack Obama’s inauguration as the 44th U.S President yesterday may see the U.S currency continue to make substantial gains in the near-term with long-term trend support targeted at $1.3682.

A firm breach of this support level would signal a further decline towards $1.3045, the lowest level since 1985, and Dollar buyers may wish to place stop orders around these levels to protect against a prolonged downside move.

The Pound also came under pressure against all of the 16 most actively traded currencies yesterday as a government report showed that the annual pace of inflation slowed to 3.1% in December, the lowest rise in consumer prices since April 2008, giving the Bank of England further scope to cut interest rates next month.

In terms of economic data, the UK currency is unlikely to find much support this morning amid the release of the minutes from the Bank of England’s last policy meeting and a unanimous vote to cut interest rates to 1.5% is expected with investors looking for some insight into the discussions on quantitative easing measures to bolster the economy.

The Euro continued to decline against the Dollar yesterday, dropping under $1.29 by the close of trading last night, but the single currency again took advantage of broad sterling weakness as German investor confidence improved more than initial forecasts in January.

The ZEW centre for European Economic Research said that its index of investor and analyst expectations rose to a reading of minus 31 from minus 45.2 in December, its third successive increase, after the ECB cut interest rates to 2.5% in the same month and announced a second spending package to combat the recession.

Policy makers within the Central Bank continued easing borrowing costs in January but the Pound’s rally against the Euro was curtailed after the ECB President indicated that the governing council would slow the pace of interest rate reductions with the next significant meeting in March.

Data Released 21st January

U.K 09:30 Claimant Count Unemployment (December)

U.K 09:30 Average Earnings (3 Mths to November)

U.K 09:30 BoE Monetary Policy Committee Minutes (7/8th Jan Meeting)

U.K 09:30 PSNCR (December)

U.S 18:00 NAHB Housing Market Index (January)

written by Adam Solomon

The Pound declined against both the Euro and the Dollar yesterday amid speculation that the government’s latest initiative to introduce a second bank rescue package in just three months won’t be sufficient in reviving the ailing UK economy and halting the first recession in 17-years.

The UK currency also lost ground against a basket of currencies, including the Australian and New Zealand Dollar after the government announced that it will give the Bank of England unlimited power in pumping money into the financial system and proposed insurance to underwrite mortgage-backed securities and toxic debt.

The Central Bank can make initial asset purchases of up to £50 billion as policy makers fight the risk of deflation with interest rates approaching zero per cent and the Treasury released a statement saying that the program “provides a framework for the MPC to use asset purchases for monetary policy purchases in order to meet the inflation target.”

The Bank of England have lowered interest rates to 1.5%, the lowest level in the Central Bank’s history, and yesterday’s announcement provides an indication that policy makers probably discussed quantitative easing measures in the last policy-setting meeting earlier this month.

Elsewhere, the UK government also announced yesterday that it will increase its stake in the Royal Bank of Scotland Plc as it converts the £5 billion of preferred shares bought last year to ordinary stock as the share price plummeted on Friday following the reintroduction of ‘short selling’.

Shares in the struggling bank slumped by the most in 20-years on the London stock exchange amid concerns that the government may have to nationalise the bank and take full control after reporting the biggest loss ever incurred by a UK company.

The stock market value dropped 67%, the most since September 1988, to just 11.6 pence as RBS said yesterday that it may post a loss of as much as £28 billion this year, surpassing Vodafone Group Plc’s £22 billion net loss in 2006.

The new measure would add at least £100 billion to £250 billion committed by the Prime Minister Gordon Brown in October in order to revitalise the financial system that has been battered by the first recession since 1991 and the move would increase the government’s grip on consumer and corporate banking.

The Pound has come under renewed selling pressure amid speculation that UK interest rates will reach 0.75% by the end of the first quarter and the MPC will take its next decision in February three days after the new stimulus package takes effect.

With UK interest rates at an historic low level and quickly approaching zero per cent, the Bank of England will have the authority to channel liquidity to financial institutions by buying assets but the move won’t allow the BoE to increase money supply, a tactic recently adopted by the U.S Federal Reserve in tackling the threat of deflation.

The Pound declined 0.4% in value against the Euro yesterday, dropping to a low of 1.1002, while the UK currency also weakened 1.9% to $1.4452 and investors are already speculating on the probability of the Pound falling below $1.4000 in the next month as the Bank of England prepare to cut interest rates again on February 5th.

In terms of economic data, the Pound may come under further pressure this morning as the UK consumer price index is expected to show that the annual pace of inflation fell to 2.7% in December from 4.1% the previous month and that would give the BoE further scope to reduce interest rates.

The Euro took advantage of broad Sterling weakness yesterday but the single currency continued to weaken versus the U.S Dollar after the European Central Bank President Jean-Claude Tichet said that the outlook for the Euro-zone economy is “substantially” worse than predicted in December.

In a speech in Paris, Trichet conceded that “the year 2009 will be very difficult” and the ECB said last month that the Euro-zone economy will contract 0.5% this year but the severity of the decline in European economic data has indicated that the economy has drifted deeper into a recession.

The European Commission reported today that the economy will shrink 1.9% in 2009 but the Central Bank are unlikely to lower interest rates again in February as Trichet signalled that March will be the next significant meeting and that may propel the Euro higher against the Pound on yield advantage.

The Dollar has continued its upside momentum against the majors despite the aggressive swings in risk sentiment and the market holiday for Martin Luther King Day but the U.S currency may continue to make gains on the day that Barack Obama is formerly introduced as the new U.S President.

Data Released 20th January

U.K 09:30 Consumer Price Index (December)

- Retail Price Index

GER 10:00 ZEW Index (January)

CAN 14:00 BoC Interest Rate Announcement

U.S Obama Inauguration

written by Adam Solomon