The Pound declines to the lowest level in two weeks versus the

The Pound declined to the lowest level in two weeks versus the Dollar yesterday but the UK currency remained largely unchanged against the Euro following the release of the minutes from the Bank of England’s last policy setting meeting, which showed that all of the members voted unanimously to cut UK interest rates in February.

The monetary policy committee, led by the governor of the Central Bank Mervyn King, voted 8-1 to cut the benchmark lending rate to an historic low of 1.0% with David Blanchflower the sole voice for a greater 100 basis point reduction, arguing that the “lower bound” of the rate should be reached “without delay”.

The remaining members of the nine-strong committee defeated Blanchflower, believing that a more aggressive cut in rates may hurt the economy and banks’ profit. While the Deputy Governor Charles Bean has said this week that the BoE may begin buying government debt because the most aggressive period of monetary easing in British history has failed to revive the economy.

Blanchflower dismissed the argument and reiterated that there are other ways for lower interest rates to boost the economy that did not rely solely on the banking sector, saying that “historically, policy errors had been made by cutting too late rather than too soon”.

The minutes also showed that policy makers discussed the benefits of so-called quantitative easing measures in February as the economy stumbles towards the largest contraction since 1980, while UK consumer prices are expected to slow below the government’s 2.0% target this year, sparking fears of a period of deflation.

There is a growing belief that interest cuts are not providing the necessary stimulus to bring the economy out of a recession and the minutes stated that policy makers will need to use alternative policy measures including the purchase of government bonds and other securities, financed by the creation of Central Bank money.

The Bank of England have recently predicted that the UK economy will contract at an annual pace of 4% by the end of the first quarter, while inflation will slow to just 0.5% by the end of 2010. The minutes showed that policy makers are very concerned with inflation dropping under 2.0% and that may encourage policy makers to stop cutting rates after a projected 50 basis point reduction in March.

The Pound continued to make gains against the Euro yesterday but the UK currency struggled versus the majority of 16 most actively traded currencies, after reports in the Daily Telegraph showed that the UK’s credit rating may be lowered by Standard & Poor’s as the government steps up borrowing to bailout banks.

Together with the negative tone of the minutes, the report in the Telegraph will act as another variable to encourage traders to sell Sterling, while UK stocks fell for a fifth day with the FTSE 100 Index reaching the lowest level in three months on concerns that the global recession is deepening.

Nevertheless, the Euro has come under renewed selling pressure this week and that may continue in the near-term, amid concerns that the European Union will only be able to play a limited role in financially supporting Eastern European countries like Ukraine, Croatia and Poland.

The Monetary Affairs Commissioner Joaquin Almunia said that the EU cannot provide non-member countries with the same kind of assistance which may be available to EU members and would be willing to “coordinate the kind of support this is needed to avoid a deepening of the crisis” with member states including Austria.

The extent of the downturn in economic growth in Eastern European countries has prompted speculation of a delayed recovery in the Euro-zone and the single currency extended its losses against the Pound after construction output fell by the most since 1995 last year.

The global economic slowdown has curbed demand for new buildings and homes across the Euro-zone as construction fell 10% year-on-year in December, the biggest decline since 1991, resulting in a full-year contraction of 2.7%, as tighter credit conditions slowed new development.

The Dollar rallied against the Euro yesterday, to the highest level in almost three months, after the U.S President Barack Obama pledged $275 billion to help stem the mounting number of foreclosures, with the plan intended to help as many as 5 million homeowners to refinance conforming loans guaranteed by struggling financial institutions like Fannie Mae and Freddie Mac.

In terms of economic data, the Dollar remained resilient and almost completely reliant on risk sentiment the U.S currency shrugged off reports that builders broke ground on the fewest number of new homes on record as the fundamental lack of credit and plunging sales exacerbated the worst housing slump since the Great Depression.

Data Released 19th February

U.K 09:30 PSNCR (January)

U.S 13:30 Initial Jobless Claims (w/e 13th February)

U.S 13:30 Producer Price Index (January)

- Ex Food & Energy

U.S 15:00 Leading Indicators (January)

U.S 15:00 Philly Fed Business Survey (February)

written by Adam Solomon