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
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