The Pound remained largely unchanged against the Dollar last night but the UK currency relinquished much of the earlier gains overnight as U.S lawmakers argued over the terms of the financial rescue plan, while House Republicans undercut the Bush administration and left it to congressional leaders to thrash out a compromise.
The prospective $700 billion bailout of the U.S financial system is still yet to be finalised, while the Bank of England, along with the majority of Central Banks, have said that they will allow institutions to borrow Dollars from them for a week in a fresh effort to calm the turmoil that has engulfed money markets.
The Pound is largely reactive to news coming out of the U.S and until a deal is agreed we can expect an increased level on intraday volatility and although we have fallen away from the Fibonacci retracement level above 1.8700, the Pound is still trading 0.4% higher versus the Dollar this week.
The run of increases represents the longest run of gains since May while the Pound has also risen well above 1.2600 versus the Euro amid concerns that the Euro-zone economy slipped into negative growth in the second quarter as Finance Ministers express concerns that the market turmoil will damage the global economy.
The UK Prime Minister, Gordon Brown, urged Congress yesterday to approve the plan for financial companies and Brown is due to meet President George W Bush today to discuss the escalating threats to the world economy and the best course of action to alleviate the problem.
Money market rates have soared higher in recent weeks as banks curtail lending while concerns are growing that the deepening financial crisis will increase unemployment as HSBC Holdings Plc cut 1,100 jobs in its global banking and markets division.
Nevertheless, the Bank of England have so far failed to act in terms of reducing borrowing costs and MPC member, Kate Barker, said yesterday that the threat of the fastest pace of inflation is a decade may continue despite the 30% drop in oil prices since July.
The tone of her statement seems to suggest that Barker may be reluctant to follow her colleague and staunch dove David Blanchflower in calling for an immediate and aggressive cut in interest rates as early as next month.
The UK has a significant stake in the outcome of the U.S financial market rescue plan and while the details of the bailout are still yet to be clarified, the stability proffered to the global credit market could potentially help avoid a severe global recession.
The UK economy is on course for its first recession since the early 1990s as the major slum in housing and contraction in household spending brings growth to a grinding halt and the volatility sweeping through credit markets means that Bank’s are not prepared to lend while rising default rates and expensive mortgage will prevent a recovery in the property market.
Another concern for Sterling sentiment is that the overnight index swaps are pricing in over 100 basis points of monetary easing over the coming year as policy makers weigh up the crippling outlook for growth and the potential for consumer price inflation to subsequently undershoot the Central Bank’s 2.0% target.
The Euro has made robust gains against the Sterling on Thursday but the single currency again failed to consolidate on the recent move against the Dollar amid surprisingly bearish comments from ECB policy maker Nout Wellink.
Not sharing the same optimism as his colleagues, Wellink insisted that market uncertainty and volatility will last for ‘some time’ and although the ECB’s governing council members have advocated the need to maintain risks to price stability, the deepening financial crisis may just create a division within the Central Bank.
Data Released 26th September
GER 07:00 Import Prices (August)
U.S 13:30 Final Gross Domestic Product (Q2)
U.S 14:55 Michigan Sentiment (September Final)
written by Adam Solomon
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