The Pound continued its downward slide against the majors yesterday, edging closer towards the lowest level on record versus the Euro while the U.K currency also slipped under the support at 1.8300 against the Dollar following the release of the Nationwide housing survey.
UK house prices fell at the fastest annual pace since the first quarter of 1990 as the average cost of a home in Britain fell 10.5% to £164,654 while a separate report from Confederation of British Industry showed that a gauge of retail sales declined to a 25-year low in August.
The negative tone of the reports is just the latest indication that the UK economy is on the brink of its first recession since the early 1990s after gross domestic product failed to expand in the second quarter while the increased cost of living curtailed spending.
The declining sentiment surrounding the outlook for growth has led to speculation that the Bank of England will resume a period of monetary easing as the impact of the credit crisis spreads through the economy and inflationary pressures ease.
Economists are no longer speculating on the probability of a recession and insist that the UK economy has already entered a period of contraction as the recent CBI numbers came in much worse than anticipated and dealt yet another blow to Gordon Brown’s party.
During the last recession, the UK economy suffered five straight quarters of contraction starting in the third quarter of 1990 as home values plummeted 13% in three years and unemployment almost doubled to 9.9% in April 2003.
The Pound has weakened as the outlook for growth deteriorates and the UK currency looks set to extend its 7% depreciation against the Dollar amid speculation of how long and severe the economic slump will prove to be.
The renewed optimism surrounding the Euro suffered a blow yesterday as the single currency declined against the Dollar following reports that European retail sales plunged for a third consecutive month in August.
The EC sentiment index showed that the prospect of a recession eroded consumer confidence in the region and the recent tone of economic data suggests that the economy is highly unlikely to recover from the slump in the second quarter.
However, the European Central Bank have maintained a hawkish stance on monetary policy and with inflation more than double the Central Bank’s target, policy maker Axel Weber though it necessary to remind the market there is no scope to lower interest rates.
The Dollar bounced back against the Dollar yesterday and also made further gains versus the Pound following reports that the U.S economy unexpectedly grew in the second quarter after crude oil prices dropped $2 on the session.
Oil prices fell after the International Energy Agency released a statement that said it would tap strategic stockpiles should a tropical storm hit production in the Gulf of Mexico and prices have now fallen 22% since touching a record high of $147.67 a barrel on July 11th.
A report from the Commerce Department showed that the U.S economy expanded at an annual pace of 3.3% in the three months to June helped by an increase in exports but the expansion is unlikely to last in the second half of the year as house prices continue to decline.
Data Released 29th August
EU 10:00 Harmonised Index Of Consumer Prices (Flash – August)
EU 10:00 Unemployment (July)
U.S 13:30 Personal Income (July)
- Spending
- Core PCE
U.S 14:45 Chicago PMI (August)
U.S 14:55 Michigan Sentiment (August – Final)
written by Adam Solomon
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