Following on from last week, the Pound declined for eleven consecutive trading days against the Dollar to record the longest run of losses in at least 37-years amid speculation that an impending recession will force the Bank of England to cut interest rates from the current 5.0%.
The UK currency posted its fourth weekly drop and also recorded sharp losses against a basket of currencies after the Bank’s quarterly inflation report showed that policy makers have revised down UK economic growth forecasts while unemployment climbed by the most in 16-years.
The accompanying statement from the BoE Governor, Mervyn King, acknowledged that the economic climate is likely to worsen as tourism and tax revenue fall while the broad impact of the credit crisis and a declining labour market will curtail the pace of consumer spending.
The Pound has tumbled roughly 6% in value against the Dollar since July 31st and the scale of the moves in such a short space of time means that a technical bounce is likely but the negative sentiment surrounding the outlook for UK interest rates may result in a short period of consolidation before a further downward move.
Nevertheless, the Bank of England have a dual mandate in balancing the risks to growth against accelerating inflationary pressures and the Pound should find some support on Wednesday providing the minutes reflect concerns over rising consumer prices.
The annual pace of UK consumer price inflation has accelerated to a decade high at 4.4% and more than double the Bank’s 2.0% target as record high food and energy costs force manufacturers to pass on higher costs to the consumer while an increase in the cost of living will prompt higher wage demands.
At least two members of the BoE’s monetary policy committee have expressed concerns over the threat of inflation and a three way split in the voting pattern would signal a reduction in borrowing costs will not be forthcoming in the short-term, which may help the Pound rally from a near two year low versus the Dollar.
The Euro slumped against the majority of the major currencies last week, extending its collapse to 1.4660 versus the Dollar while the single currency also recorded losses against a weak Pound after economists priced in nearly 40 basis points worth of rate cuts over the next year.
The weakening tone of economic reports has indicated that the European economy is far from immune to a U.S led global slowdown and despite the ECB’s relentlessly hawkish stance on policy, the Euro is struggling amid suggestions that the economy will contract in the second quarter.
The economic calendar in the Euro-region is light this week but the focus will shift to the German ZEW survey for investor confidence where the headline index is expected to improve modestly in August.
The Dollar’s dramatic upside move has seen the U.S currency rocket to a six month high against the Euro and extend its rally to five weeks versus the Pound, the longest winning streak to February 2006.
In addition, the overwhelming decline in commodity prices has seen traders move back into the Dollar as a hedge against inflation as the increased appetite for risk aversion saw many of the high yielding currencies struggle to make gains.
Data Released 18th August
U.K 00:01 Rightmove House Price Survey (August)
EU 10:00 Trade Balance (June)
U.S 18:00 NAHB – Home Builders Survey
written by Adam Solomon
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- The Euro rallies to new record high against the Pound and the Dollar as Euro-zone inflation accelerates to the highest level in 16-years
- The Pound falls through the $2.00 barrier and record the biggest weekly decline in over 2-years versus the Euro
- The Pound records further losses against the Dollar after UK house prices slumped in July
- The Dollar declines against the majors as the price of crude oil hits another record level at $1.2960 a barrel
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