The declining sentiment surrounding the UK economy sent the Pound crashing to yet another record low against the Euro on Thursday as the UK currency plunged to 1.1230 on the session after an index of manufacturers’ output expectations matched the lowest level in almost 30-years.
The Pound has now fallen to the lowest level against the Euro on four separate occasions this week amid a barrage of weakening economic fundamentals that have strengthened the case for a further reduction in UK interest rates, while the Bank of England and the Treasury calculate the benefits of less conventional techniques to boost growth.
The report from the Confederation of British industry showed that factory orders for the next quarter remained at a reading of minus 43, the lowest level since 1980, as the UK economy slips further into its first recession in 17-years and the Pound lost a further 1.2% in value against the strengthening Euro.
Elsewhere, a separate report from the Bank of England showed that UK consumer price expectations for the next year fell by the most since records began in 1999 as the recession intensified and oil prices lost over a third in value since July.
The median forecast on increases in consumer price inflation fell to 2.8%, compared with just 4.4% in August, and the Bank of England must now avert the risk of deflation as the economy sinks into possibly the worst recession since the 1970s, according to BoE policy maker Andrew Sentence.
The significant drop in consumer price expectations will provide further scope for the Bank of England to reduce interest rates beyond the current 2.0% and the Pound is struggling amid speculation that policy makers will enact another sharp cut in January, to possibly to the lowest level in the Central Bank’s history.
The main objective for the government and BoE policy makers is to encourage banks to loosen credit conditions and revive consumer spending that would help boost services and stimulate the economy.
Woolworths Group Plc started a closing down sale yesterday as the owner of 815 UK stores failed to attract a rescue bid that would save more than 25,000 jobs in what will represent the largest collapse of a UK retail chain on record.
The intense speculation surrounding the prospect of zero per cent interest rates in the UK will continue to undermine Sterling sentiment over the coming months and only some evidence of a recovery in UK fundamentals will prevent the Pound from plummeting further against the Euro.
Nevertheless, UK stocks rallied yesterday as the FTSE 100 Index climbed to a one-month high on the session, led by energy companies, as crude oil prices surged 10% higher after the Saudi Arabian oil minister said he had delivered the massive output cuts promised to OPEC, a sign that supplies are smaller than initially anticipated.
The Euro is gathering in momentum against the majors as the single currency continued to rally higher versus the Dollar despite speculation that the German economy will contract 2.2% in 2009 after a report from the Munich based Ifo institute predicted the worst recession since the end of the Second World War.
The economic slump will continue into 2010 as declining tax revenue and bigger government spending on unemployment benefits will push Germany’s budget deficit to 1.4% of gross domestic product in 2009 and 2.9% the following year.
This latest forecast from the Ifo adds to recent evidence that the German economy is facing its deepest economic slump since returning to democracy in 1949 and that will increase pressure on Chancellor Angela Merkel to play a more active role in stimulating growth and encourage the ECB to continue the pace of monetary easing.
However, the Euro has found support this week as policy makers shy away from committing to another rate reduction in January as governing council member Axel Weber warned against reducing borrowing costs below 2.0%, suggesting that the Central Bank may be close to the end of its rate-cutting cycle.
Just a week after slashing interest rates by 75 basis points to the lowest level in its history, the ECB have expressed little appetite in following the Federal Reserve and Bank of England in continuing an aggressive easing in monetary policy and that may propel the Euro higher over the coming weeks.
The Dollar has been under increasing pressure against majors this week and the U.S currency may extend its decline in the near-term after the cost of borrowing dollars tumbled and indicated weakening demand for year-end funding.
The Dollar fell to the lowest level in seven weeks against the resurgent Euro yesterday as a separate government report showed that the U.S trade deficit unexpectedly widened in the latest figures for October after exports slid to a seven month low, while the number of Americans filing for unemployment claims surged to the highest level since 1982.
The aggressive swings in risk sentiment is also driving the Dollar lower as discussions on a U.S automaker bailout reaches the Senate and politicians negotiate a tentative compromise on a $14 billion rescue package that will probably be rejected and that may revive Dollar sentiment as an element of risk aversion creeps into the market.
Data Released 12th December
EU 10:00 Industrial Production (October)
EU 10:00 Labour Cost (Q3)
U.S 13:30 Producer Price Index (November)
- Ex Food & Energy
U.S 13:30 Retail Sales (November)
- Ex Autos
U.S 14:55 Univ. Michigan Sentiment (December Prelim)
U.S 15:00 Business Inventories (October)
written by Adam Solomon
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