Following on from last week, the Pound declined for a second week against the Dollar as the FTSE 100 Index of equities dropped more than 6% by Friday, increasing demand for the U.S currency as a haven. While UK home repossessions rose to a 12-year high and the Bank of England Deputy Governor John Gieve said that Britain is threatened with a decade long recession.
Bank’s took possession of 40,000 UK homes in 2008, up 54% from the previous year and the report from the Council of Mortgage Lenders also showed that the total will reach 75,000 this year, the highest number since 1991, as homeowners struggle to cope with the credit crisis, despite the most aggressive policy easing in history.
The Bank of England have slashed interest rates from 5% in October to a record low of 1% in February in a vain attempt to prevent the recession from deepening and will probably cut by another 50 basis points in March.
Gieve also indicated that the Central Bank will look at less conventional techniques to revive growth and have purchased £340 million in commercial paper during the first week of operations for its asset-purchase facility.
The commercial paper market is used by companies to cover day-to-day costs like rent and UK government bonds rallied on Friday as the fall in the stock market increased demand for the relative security of fixed-income debt.
In terms of economic data, the Pound found some support on Friday after a report from the Office of National Statistics showed that UK retail sales unexpectedly rose in January as companies slashed prices, supplementing the effects of rising job losses and a deepening economic slump.
Sales climbed 0.7% after a surprising 1.7% increase in December but economists seemed susceptible of the report and questioned the reliability of the data after the economy crumbled under the weight of the worst contraction since 1980, while retailers like Woolworths Plc closed its doors.
Elsewhere, the Prime Minister Gordon Brown urged banks to adopt a more realistic method of lending as they struggle to cope with the financial crisis and look to rebuild balance sheets with the help of taxpayers’ money.
The Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc are both part-owned by the tax payer and have asked the government to insure nearly £500 billion of assets as part of the Treasury’s plan to boost lending.
While Brown said that “we do want to see the reinvention of the traditional savings and mortgages bank in Britain, for loans to be made on prudent and careful terms, not just to people with large deposits.”
There is a strong degree of risk aversion creeping back into the market as policy makers fight to protect the UK economy from the “serious risk” of a depression, like that suffered by Japan in the 1990s. Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishsi said that “any king of recovery in the Pound will look futile.”
The UK currency fell back towards 1.1250 against the Euro on Friday and the Pound may come under further selling pressure as data released this week includes the CBI distributive trades survey, Nationwide house prices and consumer confidence. All of which are expected to to show sharp falls from the already depressed levels, while the revised estimates of UK gross domestic product will point to a worsening slump in growth.
The Euro slumped to the lowest level against the Dollar in three months, while the single currency pulled back some gains versus the Pound, despite speculation that the financial turmoil in eastern Europe may quicken the economic downturn in the 16 nations that use the Euro.
Moody’s Investors Service exacerbated the negative sentiment for the Euro, saying that the credit ratings of Austrian, Swedish and other banks with subsidiaries in eastern Europe may be cut as economies in the region deteriorate.
The Euro subsequently declined 1.7% against the Dollar but the single currency recovered some of the losses after the German finance minister Peer Steinbrueck told reporters the following day that the larger nations in the Euro-zone would act should countries face problems and strongly rebuked any speculation of a break-up in the currency.
European Central Bank policy maker Lorenzo Bini Smaghi said that European Union rules will permit the EU to act as whole in helping member states in “economic difficulty”. However, his comments are in contrast to a recent statement from his colleague Juergen Stark, who said that EU states can’t be responsible for the debt liability of other member nations.
European manufacturing and service industries unexpectedly contracted at the fastest pace on record in February as the purchasing managers’ index dropped to a report of 36.2, despite forecasts of a more modest decline towards 38.5, and the ECB will cut its benchmark lending rate below 2.0% in March, in an attempt to revive sentiment.
As the element of risk aversion stalks the market, the Dollar and the Japanese Yen advanced against the majors amid fresh concerns that the worsening losses at financial firms will increase demand for havens. Global stocks continued to decline as both Citigroup Inc and Bank of America Corp slumped to the lowest levels in over 18-years.
The Dollar is almost completely susceptible to swings in risk sentiment and the U.S currency may decline should equity markets rally this week. While the tone of economic data still points to a worsening recession as new home sales probably sank to a record low in January and durable goods orders declined for a sixth straight month.
Data Released 23rd February
No Data of Significance
written by Adam Solomon
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