The Pound continues to rally against the majors as a cut in U.S interest rates increases the allure of higher-yielding currencies


By on October 31st, 2008.
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The revival in global stock markets continued to bolster Sterling sentiment yesterday as the Pound rallied towards the highest level in a week versus the Dollar, while the UK currency also climbed for a third day against the Euro as a cut in U.S interest rates increased the allure of higher-yielding currencies.

The Pound has enjoyed its longest winning streak against the Euro in almost two weeks after UK and U.S stocks rallied higher following the Federal Reserve’s decision to lower borrowing costs by 50 basis points and provided a further $120 billion to spur lending in emerging markets.

U.S interest rates currently stand at just 1.0% with the UK benchmark lending rate at 4.5%, which remains the highest among the Group of Seven nations, and the recent revival in risk appetite is making the Pound a far more attractive commodity for investors.

The UK currency rose a further 1.8% versus the Dollar by the close of trading last night, rising to a high of $1.6672 after posting the biggest two day gain in more than 23 years this week as the UK FTSE 100 index gained for a third consecutive day.

Nevertheless, the Pound is still down over 8% versus the Dollar since the end of September and is poised to record the fourth monthly drop against its U.S counterpart but there are signs that the market has hit a near-term bottom as central banks around the world cut rates and inject liquidity.

In terms of economic data, the Pound shrugged off an earlier report from the Nationwide Building Society, which showed that UK house prices fell by the most since records began in 1991 with the average cost of a home dropping 14.6% from this stage last year.

Home values continue to decline as banks and lenders alike tighten credit conditions, while the probability of the first recession in seventeen years has deterred potential buyers despite the likelihood of a further substantial reduction in borrowing costs.

In a speech to the University of Kent yesterday, Bank of England policy maker David Blanchflower highlighted the necessity for a significant reduction in interest rates saying, “if rates are not cut aggressively we do face the prospect of a relatively deep and long lasting recession”.

Blanchflower has advocated the need to lower interest rates for the past year and the short-term revival in Sterling sentiment may be severely tested in the run up to the next rate announcement on November 6th amid speculation of a 1% cut.

The Monetary Policy Committee have already lowered the benchmark lending rate by half a percentage point in October in a coordinated joint action with six other central banks to stem the crisis even after consumer price inflation accelerated to 5.2% last month.

The rising appetite for high-yielding currencies has sent the Euro rising higher against the Dollar but the single currency continued its downside momentum versus the Pound after an index of European consumer confidence fell to a record level in October.

The escalating financial crisis restricted corporate investment in the region as sentiment plummeted and the index of sentiment dropped more than initial forecasts to register the sharpest fall since the data was first compiled in 1985.

The Euro-zone economy is obviously in the grip of a recession and the Euro may continue to decline against the majority of the majors as a report this morning is expected to show consumer prices retreated in October, which correlates with the vast decline in oil prices over the past three months.

The rise in stocks, commodities and equity markets over the past week has curtailed the Dollar’s momentum and the greenback failed to find any support yesterday following reports that the U.S economy suffered its biggest decline since 2001 in the third quarter.

Gross domestic product contracted 0.3% in the three months through September, raising the prospects of the worst recession in a quarter of a century and therefore boosting the chances of Barack Obama and fellow Democrats in next week’s elections.

According to the report from the Commerce Department, the decline was actually worse than anticipated but the economy may be poised for a larger drop this quarter after the record 20-year expansion in consumer spending came to an abrupt end.

The decline in the Dollar was also exacerbated following comments from the Federal Reserve chairman Ben Bernanke, who signalled yesterday that he’s ready to cut interest rates to the lowest level on record should the Reserve Bank’s actions fail to stem the deepening economic slump.

Data Released 31st October

U.K 10:30 Gfk Consumer Confidence Survey (October)

EU 10:00 Flash Harmonised Consumer Prices (October)

EU 10:00 Unemployment (September)

U.S 12:30 Personal Income / Consumption (September)
– Core PCE

U.S 12:30 Employment Cost Index (Q3)

U.S 13:45 Chicago PMI (October)

U.S 13:55 Michigan Sentiment (October Final)

written by Adam Solomon

Related posts:

  1. The Dollar may weaken further as the U.S Housing Market continues to decline following higher interest rates
  2. The Pound fails to rally against the majors after the Bank of England raised interest rates for the fifth time in under a year
  3. The Pound fails to rally against the majors after the BoE Governor, Mervyn King, indicates that the Bank has finished cutting interest rates
  4. The Dollar rallys against the majors as U.S consumer confidence unexpectedly rose in July despite higher petrol prices and rising interest rates
  5. The Pound may rally this morning if the report on consumer price inflation increases by more than the 0.1% forecast

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