The overwhelming decline in Sterling sentiment continued yesterday as the UK currency plunged to a fresh 22-month low against the Dollar, falling through the support at 1.8836 to a low of 1.8646 by the close of the European session following the release of the Bank of England’s quarterly inflation report.
The Pound also recorded heavy losses against all of the 16-most actively traded currencies after the Central Bank cut its forecast for UK economic growth as unemployment rose by the most in almost 16-years.
Claims for jobless benefits increased by a staggering 20,100 in July to 864,700, the biggest increase since December 1992, as the report illustrated the impact of the credit crisis on the labour market as rising unemployment will curtail consumer spending and exacerbate the worst housing slowdown in 18-years.
The Governor of the BoE, Mervyn King also said that the annual pace of inflation, which currently stands at a decade high of 4.4%, will fall below the government’s 2.0% target in two years as long as policy makers keep interest rates steady at 5.0%.
Nevertheless, the Pound declined significantly in the aftermath of the report, falling under 1.2600 versus the Euro, while also falling under $2.00 against the Canadian Dollar as traders largely ignored King’s comments and focused on the downward revisions to economic growth.
The UK economy is forecasted to grow roughly 0.1% on a year-on-year basis in the first quarter of 2009 and that’s compared with a previous estimate of 1.0% and King conceded that “broadly flat output means there is a possibility of a quarter or two of negative growth.”
Sellers of Sterling have suffered a great loss in a very short space of time and the projections for a recovery in sentiment is weak as traders speculate on the timing of an interest rate reduction as the economy spirals towards contraction.
The Euro again took advantage of broad Sterling weakness yesterday but the single currency has been unable to break above $1.50 versus the Dollar after European industrial production remained unchanged in June after by the most in 16-years last month.
Manufacturing in the in the Euro-zone fell 0.5% from this stage in 2007 as the region’s economy stutters to the worst performance since the introduction of the Euro in 1999 and the report is just the latest indication that growth will slip into negative territory.
Nevertheless, the European Central Bank have maintained a hawkish stance on inflation and policy makers have frequently highlighted the inherent risks to price stability, which means that the governing council will probably hold interest rates at the highest level in seven years, at least for the time being.
The focus this morning will fall on the harmonised index of European consumer prices and the report is expected to confirm that inflation edged higher to 4.1% in the final estimate for July but the Euro may struggle with growth expected to slip to 1.5% in the second quarter.
The renewed optimism surrounding Dollar continued as the U.S currency made further gains against the majors yesterday despite the increase in crude oil prices and reports that U.S retail sales declined for the first time in five months.
Data Released 14th August
EU 09:00 ECB Monthly Bulletin Published
EU 10:00 Gross Domestic Product (Q – Flash Estimate)
EU 10:00 Harmonised Consumer Price Index (July – Final)
U.S 13:30 Consumer Price Index (July)
- Core CPI
U.S 13:30 Initial Jobless Claims (w/e 8th August)
written by Adam Solomon
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