The Pound declined heavily against the majors yesterday, dropping under $1.4200 versus the Dollar, while the UK currency also dropped under 1.1200 against the Euro, following reports that the revised estimate of gross domestic product in the fourth quarter showed that the recession is deepening, fuelling speculation of a further reduction in borrowing costs.
According to the report from the Office of National Statistics, the UK economy contracted at the fastest annual pace since 1980, during Margaret Thatcher’s first term as Prime Minister, as the escalating financial crisis saw consumer spending and business investment dwindle.
UK gross domestic product, in the three months through December, fell 1.5% from the third quarter, matching the preliminary estimate in January, as consumer spending declined 0.7%, the most since 1991, while fixed investment dropped 2.3%.
The Pound came under renewed selling pressure against almost all of the 16-most actively traded currencies as the report sparked an increase in risk aversion, despite the drop in GDP being marginally less than economists had anticipated, as a number retailers collapsed, including Woolworths Plc and JJB Sports Plc.
In addition, a separate gauge of the report showed that UK industrial production declined 4.5% on the quarter, up from the previous estimate of 3.9%, while manufacturing slid 5.1% and officials revised up their measure of the decline in service sector growth.
The UK economy is in the midst of the worst recession in almost thirty years and will need additional stimulus to stem the downturn and ward of the risk of deflation, according to Bank of England policy maker Andrew Sentence, while a spokesman for the Treasury said that “things are likely to get worse before they get better”.
Sentence reiterated yesterday the persistent threat of price declines, increasing the prospect of a period of deflation in the UK, a sentiment echoed by the Deputy Governor of the BoE John Gieve, who that Britain faces the risk of a decade-long depression.
Both policy makers have also emphasised the need of government stimulus to stem the slide in growth and the Chancellor Alistair Darling has ordered Northern Rock Plc to expand lending by £14 billion, in an attempt to revive credit conditions and bolster spending.
The Prime Minister Gordon Brown is expected to announce further measures this week to support struggling financial institutions, including the Royal Bank of Scotland Group Plc, who are still fighting the threat of full nationalisation. The Bank of England are expected to cut interest rates by a further 50 basis points on March 5th to another historic low of 0.5% and policy makers have signaled that they want the power to create money to help stimulate the economy.
The Pound declined almost 2% in value against the Dollar yesterday amid suggestions that the recession will intensify in the first quarter of this year but the UK currency could still be on its way to a substantial upward correction over the medium term.
EU officials are increasingly concerned that the Pound’s 23% slump against the Euro over the past year could destabilise the UK economy and policy makers must be alert to the possibility that the weakness in Sterling will just scare of foreign investors, according to Neil Mackinnon, Chief economist at ECU Group.
The Euro was unable to break above the resistance near $1.2900 against the Dollar yesterday, after Standard & Poor took the decision to downgrade Ukraine’s debt rating, further enhancing concerns over the exposure of Eastern European economies. While fears that there could be further destabilizing losses with the banking sector also undermined confidence in the Euro.
However, the single currency took advantage of broad Sterling weakness, rising almost 1% on the session, despite reports that German exports plunged in the fourth quarter of 2008, sparking the biggest contraction in the economy in almost 22-years.
Exports dropped 7.3% from the previous quarter, as corporate investment dried up and the Euro may come under further selling pressure this morning amid the release of German unemployment data, which may show that the jobless rate rose again in February, while the EC sentiment index is expected to show a further decline in confidence.
The Dollar rose against the majors yesterday as the negative tone of economic data encouraged investors to seek the security of safe haven assets. The U.S currency also found support despite reports that existing home sales unexpectedly declined in January, even as falling prices made property more affordable.
Purchases fell 5.3% to an annual rate of 4.48 million, the fewest number since 1997, signaling that the worst housing slump in two decades is showing few signs of abating. Consumer’s have been waiting for President Obama’s plans to stem foreclosures and declining home values that are at the core of the economic slump.
Data Released 26th February
U.K 07:00 Nationwide House Prices (February)
GER 09:00 Unemployment (February)
GER 07:00 Gfk Consumer Confidence (March)
EU 09:00 M3 / 3 Month Moving Average (January)
EU 10:00 EC Business Climate Index (February)
EU 10:00 EC Economic Sentiment Index (February)
- Consumer / Industrial / Services
U.S 13:30 Durable Goods Orders (January)
U.S 13:30 Initial Jobless Claims (w/e 21st February)
U.S 15:00 New Home Sales (January)
written by Adam Solomon
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