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 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.
Data Released 16th December
U.K 09:30 Consumer Price Index (November)
- Retail Price Index
EU 09:00 Flash PMI Manufacturing (December)
U.S 13:30 Consumer Price Index (November)
- Ex Food & Energy
U.S 13:30 Housing Starts (November)
- Permits
U.S 13:30 Real Earnings (November)
U.S 19:15 FOMC Rate Announcement
written by Adam Solomon
