The Pound slumped to yet another record low against the Euro yesterday, falling to 1.1338 on the session following another round of worsening economic data that showed the UK economy may contract at the fastest pace in 18-years during the fourth quarter.
The report from the National Institute for Economic and Social Research illustrated the problems facing the Bank of England as UK gross domestic product fell 1% in the three months through November and will probably plunge further over the coming months, according to the accompanying statement.
The NEISR said that the data confirms that the rate of output in the UK is deteriorating and the statement also emphasised recent comments from the Chancellor of the Exchequer Alistair Darling in that the main objective is to loosen the availability of bank credit and spur lending.
Nevertheless, the statement also highlighted that “further interest rate reductions are unlikely to have much effect” despite policy makers lowering the bench mark lending rate to 2.0% this month and the government may have to utilise less conventional techniques of stimulating the economy.
BoE policy maker Andrew sentence added to the gloomy outlook for UK economic growth yesterday as he told reporters that the recession will probably be as deep and prolonged as any since the 1970s despite the government’s plans to cut taxes and pledge £50 billion in a bank rescue that has thus far failed to stop the decline.
UK interest rates are currently at the lowest level since 1951 but some major banks have refused to pass on the full extent of the cuts as an element of panic still stalks the banking system, which is still reeling from the worst financial crisis since the Great Depression.
Lenders have passed on less than half of the 150 basis points cut in November and the Bank of England followed up with another one percentage point reduction this month but it is unlikely to revive the ailing UK property market as prices slip to the lowest level since 1978.
The UK currency also fell to its weakest level on record against the currencies of its major trading partners and from a technical perspective the trend appears to be down as the Pound slumps to record lows versus Euro on an almost daily basis.
The recent pattern between stock market movement and currencies has been increasingly prevalent in recent weeks but a two-day rally in global stocks has failed to boost sentiment as the Pound is now considered a weaker asset that the strengthening Euro.
The Bank of England and the government will together recognise the benefits of a weaker Pound in bolstering the economy but officials are risking a run on the UK currency as slowing global demand and shrinking factory production means that exports are unlikely to stimulate growth.
However, the Pound bucked the trend of declines by rising to a high of 1.4880 versus the U.S Dollar amid an increase in risk appetite following reports that the UK government is considering pumping billions of Pounds into the economy in an unprecedented move to halt the recession.
The Bank of England and the Treasury are discussing the possibility of a strategy known as ‘quantitative easing’ where officials increase money supply into the economy to bolster bank reserves and therefore unlock lending restrictions in a final attempt to bring the economy out of the current slump.
The positive momentum surrounding the Euro shows few signs of slowing as the single currency also breached above $1.3000 versus the Dollar after ECB Executive Board member Juergen Stark admitted that any further rate cuts would be “small” as the Central Bank runs out of room for further easing.
ECB policy makers elected to respond the financial crisis and lower the benchmark lending rate to 2.5% last week and to the lowest level in its history as the U.S led global recession spreads to Europe.
Stark’s comments seem to indicate that the Central Bank will adopt a wait and see policy over the next month and look to re-assess the outlook for price stability before any decision is taken on a further reduction in January.
Investors were lured away from safe haven currencies like the Dollar and the Yen amid separate reports that U.S lawmakers are prepared to take a vote on a $15 billion automotive bailout that could face strong resistance within the Senate.
General Motors Corp, Chrysler LLC and Ford Motor Co are struggling to ward of bankruptcy as shares in the automakers slumped again in New York yesterday but the Republicans plans to appoint a so called ‘car czar’ may result in a similar fate unless the companies can come up with a restructuring plan by March 31st.
The Dollar may continue to struggle against the majors today as the U.S government increases its budget deficit by spending an unprecedented amount of money in yet another attempt to bolster the economy and Dollar buyers would be well placed to monitor the current trend or consider a stop order to protect against further weakness.
Data Released 11th January
U.K 11:00 CBI Industrial Orders (December)
EU 09:00 ECB Monthly Bulletin Published
U.S 13:30 Initial Jobless Claims (w/e 5th December)
U.S 13:30 Export Prices (November)
- Import Prices
U.S 13:30 International Trade Balance (October)
written by Adam Solomon
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