The Pound declines against the majors as UK inflation falls by the most in 11-years and increases the prospect of a further reduction in rates


By on November 19th, 2008.
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The Pound was unable to sustain Monday’s momentum against the majors yesterday as the UK currency found strong resistance at $1.5000 against the Dollar and also fell back under 1.1900 versus the Euro as traders speculated that the bounce may have been nothing more than a technical consolidation before a further downside move.

Sterling sentiment was further undermined as former Chancellor of the Exchequer Norman Lamont conceded that the Pound’s recent slide will help the UK economy pull out of a recession as long as it doesn’t turn into a “run” on the currency, a view echoed by BoE governor Mervyn King, who has publicly refused to rule out cutting interest rates to zero per cent in an attempt to bolster growth.

Lamont was the finance minister during the last currency crisis in 1992 and he said in an interview yesterday that “there are opportunities when a currency depreciates but as so often when you have these situations, what starts as a small move can quickly become a run”.

The Pound has lost 24% in value against the Dollar alone this year and has shrank to an all time record low versus the Euro as the monumental decline in value is reminiscent of events in 1992 when Lamont failed to prevent a sell-off in Sterling that eventually pushed the currency out of the European Exchange Rate Mechanism during John Major’s tenure as UK prime minister.

JP Morgan & Chase Co have predicted that the Pound will extend its current slump to the lowest level since 1985 with the UK currency forecast to hit $1.2800 versus the Dollar next year and fall as low as 1.0900 against the Euro amid concerns of deepening and prolonged UK recession.

Investors are encouraged to keep selling Sterling as Gordon Brown’s government steps up spending and implements a series of tax cuts to boost consumer sentiment but that will only serve to widen the biggest budget deficit since the Second World War.

The UK Treasury has a budget gap of £37.6 billion in the first half of the fiscal year as the government deliver tax breaks to low income earners, increases public spending by £4.8 billion while delaying an increase in fuel duties and helping homeowners with mortgages by removing stamp duty taxes.

Lamont also defended George Osborne in the interview yesterday after the shadow Chancellor was criticised by Gordon Brown for saying that the government risks creating “a proper Sterling crisis” and needed to be more responsible for his comments. Lamont stated that Osborne had been unfairly criticised for his comments as he had only stated what other people had been saying, while he stopped short of reccommending that the UK adopts the Euro as the Pound deteriorates.

The Bank of England have cut UK interest rates below the European Central Bank for the first time since the Euro was introduced in 1999 this month as the benchmark lending rate slides to just 3.0% compared to 3.25% in the Euro-region and investors are anticipating further cuts in the December 4th meeting.

A government report yesterday showed that the UK inflation rate had the biggest drop in at least 11-years in October as consumer prices slowed from 4.5% from 5.2% in September and the Pound declined as the tone of the report gave policy makers further scope to reduce interest rates.

An earlier report from the Confederation of British Industry, Britain’s biggest business lobby, indicated that the UK economy will contract the most in almost thirty years in 2009 and despite the Euro-zone entering its first recession since 1999, the Pound is forecasted to register further losses against its European counterpart in the short-to-medium term.

The focus this morning will fall on the minutes from the Bank of England’s last policy meeting and the report may provide an indication of how far policy makers are willing to cut interest rates, while traders will also be particular attention to the voting pattern of the nine-strong monetary policy committee.

A unanimous vote to cut rates by 1.5% earlier this month is likely to be negative for Sterling, while a separate report from the CBI should also point to further weakness in the manufacturing sector as industrial orders slump to a reading of -41 in November from -39 the previous month.

The Dollar bounced back against both the Pound and the Euro yesterday amid renewed speculation that overseas investors sought the security of U.S assets as a strong element of risk aversion saturated the market and the global economy entered a recession.

The Dollar index, which provides a measure of the U.S currency against a basket of trading partners, approached the highest level in 2-years before data from the Treasury today that is expected to confirm that overseas investors almost doubled holdings of the nation’s securities in September.

The increase in risk aversion and sustained decline in oil prices is likely to be positive for the Dollar in the month’s ahead, while the greenback also found support yesterday as U.S producer costs plunged by the most on record in October as the declining outlook for the world economy sapped demand for commodities.

The 2.8% drop in prices was much larger than forecasted and the report precedes a broader measure of U.S inflation this afternoon, which may show that consumer prices also tumbled in October as the cost of living slides by the most in 60 years and helps propel the economy back from the brink of recession.

Data Released 19th November

U.K 09:30 BoE Monetary Policy Committee Minutes 5th – 6th November

U.K 11:00 CBI Industrial Orders (November)

U.S 13:30 Housing Starts (October)

- Permits

U.S 13:30 Real Earnings (October)

U.S 13:30 CPI Index (October)

- Ex Food & Energy
U.S 19:00 FOMC Publishes Minutes of 29th October Meeting

written by Adam Solomon

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  3. The Pound continues to rally against the majors as a cut in U.S interest rates increases the allure of higher-yielding currencies
  4. The Dollar declines against the majors after the Fed held interest rates at 2% following the most aggrssive period of monetary easing in 20-years
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