The recent downside volatility surrounding the Pound continued yesterday as the UK currency, still reeling from news that consumer price inflation had remained unchanged in November, succumbed to reports that Bank of England policy makers voted unanimously to cut interest rates this month.
The nine-member monetary policy committee all elected to lower the benchmark lending rate by 25 basis points amid renewed concerns over a second credit crunch and recent evidence to suggest that the housing market is slowing.
In addition, the furore surrounding the Northern Rock fiasco has severely tested UK consumer sentiment, which has driven the economy to the fastest pace of expansion since 2004.
The tone and language used by the governor of the BoE, Mervyn King, seems to suggest that potential risks to economic growth outweighed the short-term threat of inflation.
The first unanimous reduction since the months that followed the September 11 terrorist attacks is designed to protect against any further market volatility.
The Pound has declined heavily against the majors and dropped under the $2.00 level for the first time in three months and looks set to test the support at 1.9880.
The negative sentiment surrounding the Pound saw the UK currency plummet against most of the 16 most actively traded currencies and further downside movement is likely in the near-term amid increased speculation that policy makers will continue lowering interest rates in the New Year.
After rising to within a whisker of the 1.5000 level, the Euro has gradually declined against the Dollar over the past week and continues to trade in a range versus Sterling as the ECB’s staunchly hawkish stance on monetary policy leaves the market guessing on the future outlook.
The tone and language used in the accompanying statement earlier this month seemed to suggest that the Central bank remains concerned with rising inflationary pressures and that sentiment was echoed in a statement from the ECB chairman yesterday.
Although, Trichet continues to stoke concerns surrounding inflation and the idea that there is no room to begin cutting interest rates, the ECB’s decision to loan €350 billion to aid financial markets indicates there is no room for a rise either.
In terms of economic data, the Euro struggled to make gains against the Dollar yesterday as German business confidence fell to the lowest level in nearly two years in December.
Rising credit costs combined with higher oil prices and a strong Euro threatens to curb economic growth in the region as the business climate index declined to a reading of 103.0.
Data Released 20th December
UK 09:30 Current Account (Q3)
UK 09:30 Final GDP (Q3)
U.S 13:30 Final GDP / Deflator
U.S 13:30 Initial Jobless Claims (w/e 16th December)
U.S 15:00 Leading Indicators (November)
U.S 17:00 Philly Fed Index (December)
written by Adam Solomon
Related posts:
- The Pound declines further against the Dollar as the MPC vote 9-0 in favour of holding interest rates this month
- The Pound falls dramatically as the BoE vote 5-4 in favour of raising interest rates this month
- The Pound declines heavily against the majors on speculation UK interest rates have peaked
- The Pound holds firm as the MPC vote 8-1 in favour of holding UK interest rates unchanged this month
- The Dollar declines heavily against the majors as the Federal Reserve lower interest rates by half a percentage point
