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
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