The worsening economic climate saw the Pound plunge to the lowest level against the Dollar since Margaret Thatcher’s reign as UK Prime Minister, while the UK currency also dropped to another record low versus the Japanese Yen and sank towards 1.0600 against the Euro amid concerns that the government will nationalise UK banks.
The Pound slid against all of the 16 most actively traded currencies for a second day in succession after the governor of the Bank of England Mervyn King said in a speech that the Central Bank may start buying toxic assets within weeks after cutting interest rates to the lowest level in its history.
During his statement in Nottingham, King emphasised the need to loosen credit conditions and almost conceded that the Bank of England’s aggressive easing in monetary policy had failed to stimulate the economy from possibly the worst economic slump since the end of the Second World War.
The Bank of England have cut the UK benchmark interest rate by 350 basis points to a record low of 1.5% since October alone but that won’t prevent an economic meltdown in the first half of the year as shares plunge following the re-introduction of short-selling to the market.
The Pound had weakened on speculation that policy makers discussed the benefits of quantitative easing measures in the last meeting at the beginning of the month and King said yesterday that the BoE may acquire securities such as corporate bonds to revive lending to companies and consumers.
King also highlighted the risks that inflation may fall below 2.0% over the coming months after consumer prices plummeted to 3.1% year-on-year in December and said that “it is sensible for the Monetary Policy Committee to prepare for the possibility that it may need to move beyond the conventional instrument” of cutting interest rates.
In the speech, King set an agenda for monetary policy and backed the government’s plan to give unprecedented powers to the Bank of England, signalling more interest rate cuts to come, while the Central Bank may reach a point of using quantitative easing techniques to target inflation and in effect limit the risks of deflation.
UK stocks declined for a third consecutive day amid concerns that the recession will worsen, while UK economic data showed that unemployment rose at the second-fastest pace since 2001 and shares in Barclays Plc fell for a seventh straight day on speculation that it may be forced to take more writedowns and be nationalised.
Shares in the struggling bank slumped a further 35% in early trade but recovered to close down 9.3% on the session to just 66.1 pence a share and there is genuine fear among shareholders, who see an increasing risk of nationalisation.
The UK government has announced plans to guarantee toxic assets and has given the Bank of England the power to buy £50 billion of securities in a second bank bailout since October in the hope of reviving confidence in the banking system but Jon Mcfall, the chairman of the Treasury Committee, has urged more banks to be nationalised.
McFall, who leads a Parliament committee overseeing Treasury policy, is reported to be a political ally of Gordon Brown and he also urged the Financial Services Authority to reconsider its decision to lift the ban of short-selling UK bank stocks as shares in the country’s biggest banks continue to decline.
The share price for the Royal Bank of Scotland Plc has fallen 75% in the past four days trading alone, while shares in Barclays Plc have now halved in the same period, which coincides with the lift in the ban on short-selling that was imposed last September following the collapse of Lehman Brothers’.
The Pound also came under pressure following the release of the minutes from the Bank of England’s last policy-setting meeting where it was revealed that the MPC voted 8-1 in favour of a 50 basis point reduction in UK interest rates, while David Blanchflower was the sole voice for a greater 1% cut.
Elsewhere, UK jobless claims rose at the second fastest pace since 1991 in December as the worsening economic climate forced companies to shed jobs with the number of people out of work and claiming benefits rising 77,900 to 1.16 million and that represents the biggest increase since January 2000.
Although the claimant count wasn’t quite as bad as initially anticipated, the reports combined have put further downward pressure on Sterling as the UK currency slid 2.2% against the Dollar, falling under the major support level at $1.3682 and a significant breach of this level would indicate a further move towards $1.30.
Data Released 22nd January
EU 09:00 ECB Monthly Bulletin Published
EU 10:00 Industrial Orders (November)
U.K 11:00 CBI Monthly Industrial Trends (January)
U.S 13:30 Housing Starts (December)
U.S 13:30 Initial Jobless Claims (w/e 17th January)
written by Adam Solomon
Related posts:
- The Pound decliens heavily against the Dollar following reports that shares in Barclays plc were temporarily suspended
- The Pound declines against the Dollar as crude oil prices fall to the lowest level in six weeks
- The Pound declines as UK mortgage approvals fall to the lowest level since records began in 1999
- The Pound falls below 1.9000 for the first time in two years after oil prices fall to the lowest level in 14-weeks
- The Pound declines as UK retail sales continues to fall to the lowest level in nine months
