Home Currency News The Pound declines heavily against the majors as Mervyn King indicates a series of rate cuts to come

The Pound declines heavily against the majors as Mervyn King indicates a series of rate cuts to come

Posted by at March 26th, 2008. Connect with this author on .

The renewed sense of instability surrounding financial markets coupled with the deteriorating outlook for the U.S economy saw the Dollar decline yesterday against almost all of the 16 most actively traded currencies.

The underlying weakness in the U.S currency can also be attributed to speculation that the Fed will lower interest rates by a further 50 basis points next month and that sentiment was echoed in the consumer confidence data released yesterday.

The Conference Board’s index slipped to a reading of 64.5 in March, which represents a five year low, while the outlook for the economy plunged to the lowest level since Richard Nixon was President.

The overwhelming decline in consumer confidence will be a major concern to policy makers as declining stock prices and property values limit consumers’ ability to spend. A sustained drop in the pace of spending, which accounts for more than two thirds of the economy, would surely invoke the second recession in just ten years while further evidence on the U.S housing market shows that the worst slump in nearly twenty years is showing few signs of abating.

The S&P;/Case-Shiller home price index dropped to a reading of 10.7% in February while prices in 20 metropolitan areas fell by the most on record. As the market swells with unsold properties, prices will continue to decline while a substantial rise in foreclosures and tighter lending conditions makes it harder to credit.

The overwhelming appreciation of the Euro continued yesterday as the single currency took advantage of broad Dollar weakness to close last night above the 1.5700 level and further upside momentum is likely today amid the release of the IFO sentiment index.

German business confidence may rise for a third consecutive month in March and provide further evidence that Europe’s largest economy is resisting the credit crisis and the surging cost of oil.

The index of confidence is expected to deteriorate as the ECB refuses to alter their stance on monetary policy and the Euro appreciates to record highs against both the Pound and the Dollar.

The revival in Sterling sentiment saw the UK currency break above the $2.00 barrier versus the Dollar last night while the Pound also registered substantial gains against the Euro amid reports that the furore surrounding HBOS plc were severely over exaggerated.

Nevertheless, the medium term outlook is that the Pound will continue to decline against the Euro as the market expects the UK economy to under perform the Euro-zone.

There is a fundamental lack of economic data released this morning so the focus will once again return to risk appetite while U.S data will be the primary driver of Sterling. Nevertheless, the governor of the Bank of England, Mervyn King, has intervened and curtailed any upside momentum for the Pound as he indicated that the Central Bank would begin a series of rate cuts in order to bring some stability to the market.

In a testimony to lawmakers, King said that the Bank is discussing “longer-term” solutions to the credit crisis but will continue to provide emergency funding in the meantime.

Data Released 26th March

EU 09:00 Current Account Balance (January)

EU 10:00 Industrial Orders (January)

GER 09:00 Ifo Index (March)

U.S 12:30 Durable Goods Orders (February)

U.S 14:00 New Home Sales (February)

written by Adam Solomon

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