The Pound has enjoyed its biggest two-day advance against the Dollar in over 23-years as UK stocks rallied for a second consecutive day yesterday, while a separate report showed that mortgage approvals actually rose for the first time since June 2007.
The UK currency made widespread gains across the board, rising by the most in nearly eight years versus the Euro after a report from the Bank of England showed that lenders approved 1,000 more home loans last month than in August and the FTSE 100 Index surged 7.1% on the session.
UK lenders approved 33,000 loans in total for home purchases in September, up from 32,000 in August, which is still near the lowest level since comparable records began in 1999 but the unexpected increase, however modest, was the catalyst in sending the Pound rising higher against the majority of the majors.
There is an element of risk appetite creeping back into the market as equities and commodities recover earlier losses and although the Pound is headed towards the longest run of declines since February 1993, there are signs that investors are returning to high-yielding currencies as stability returns to the market.
The Chancellor of the Exchequer Alistair Darling said yesterday that the government will pledge extra borrowing to support economic growth as the official figures suggests that the UK economy has entered its first recession since 1992.
The short-term recovery in Sterling sentiment will last as long as risk appetite develops and the Pound jumped 3.4% in value against the Dollar yesterday, rising to a high of 1.6474 in London from just $1.5901 yesterday, bringing its two day gain to 5.6%, the most since September 1985.
The degree of confidence returning to global financial markets was also evident in the Pound’s performance against the Yen and the UK currency continued that momentum yesterday after gaining by the most in 37-years the previous session.
In addition, the Australian and New Zealand Dollar have both made substantial gains against the majors, including the Pound, while the Canadian Dollar has benefited from an increase in the price of crude oil, which increased more than $4 in New York amid speculation that a rate cut would boost fuel demand.
There has been widespread speculation surrounding the Bank of England rate announcement on November 6th and policy makers will probably cut their key interest rate by half a percentage point to 4.0% to match the Fed’s action yesterday evening.
The Monetary Policy Committee have already lowered rates by 50 basis points in a coordinated effort with six other central banks earlier this month in an attempt to stem the financial crisis and provide some confidence to the global banking system.
The shift in sentiment away from an environment of ‘risk aversion’ has also helped the Euro sustain some unlikely momentum against the Dollar but the single currency continued to decline against the Pound, closing just under 1.2700 last night after reaching 1.2756 earlier in the session.
The harmonised index of German consumer prices showed that the annual pace of inflation slowed by more than economists forecasts in October, which correlates with the overwhelming fall in energy prices feeding through to the broader economy.
Oil prices have more than halved since reaching a record high of $147.26 a barrel in July, reducing the risks to the price stability across the Euro-zone and the ECB President Jean-Claude Trichet said this week that the bank may lower borrowing costs again in November.
The inflation rate declined to 2.5% from the 3% in September and the report gives the European Central Bank the scope to lower interest rates from the current levels and help bolster the economy as growth slips deeper into contraction.
The Dollar slumped by the most since 1998 against the majority of the major currencies yesterday and extended that decline after the Federal Reserve cut interest rates to a level matching the lowest in the last 50-years last night.
The Dollar’s perceived safe haven status has sent the U.S currency rising to the highest level in five years versus the Pound this month and a further drop in borrowing costs will make the Dollar an even more attractive commodity to investors if the historic level of volatility surrounding financial markets returns.
Nevertheless, with the appetite for risk slowly creeping back into the market, the Dollar remains under pressure in the short-term as the greenback slumped a further 2.1% versus the Euro and the Fed confirmed that risks to the economy remain the primary concern.
A recovery in U.S stocks combined with a two day jump in oil prices has also hurt Dollar sentiment, while data yesterday showed that U.S durable goods orders fell for a second consecutive month in September as the credit crisis curtailed sales and caused a lack of business investment.
The 1.1% drop in bookings was indeed slightly less than economists forecasts but the slump in manufacturing has worsened in October and the decline in investment will contribute to a contraction in the U.S economy for the second straight quarter.
Data Released 30th October
EU 10:00 EC Business Climate (October)
EC Economic Sentiment (October)
– Consumer / Industrial / Services
U.S 12:30 Gross Domestic Product (Q3 Advance)
U.S 13:30 Initial Jobless Claims (w/e 24th October)
written by Adam Solomon
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