The Pound plummeted against the majors yesterday, dropping under $1.4000 versus the Dollar for the first time since 2001, while the UK currency also declined heavily against the Euro and fell to a record low versus the Japanese Yen after the UK government’s second bank bailout in just three months.
The announcement from the UK Prime Minister Gordon Brown was met with widespread cynicism as investors encouraged traders to dump Sterling and the Pound subsequently recorded its biggest one-day drop against the Euro in a month amid concerns that the package won’t be sufficient in bringing the economy out of a recession.
The re-introduction of ‘short-selling’ on January 16th saw share prices in the banking sector fall to historic lows with the RBS Group Plc falling again yesterday following a 67% drop in the share price on Monday and the government also said that it will support the struggling bank, increasing its stake after the bailout in October.
The Royal Bank of Scotland took another step closer to full nationalisation yesterday as the Bank promised to make £6 billion available to UK borrowers but investors are sceptical on whether the UK government’s plans to inject another £50 billion into the banking system will make a dent in the worst financial crisis since the Great Depression.
The virtual collapse in the UK bank system has put an incredible amount of downside pressure on the Pound and the UK currency slid 4.4% against the resurgent Yen yesterday, while tumbling 3.6% against the Dollar to an intra-day low of $1.3863, the lowest level since June 2001.
The trend for the Pound versus the Dollar is clearly down and the feel good factor from Barack Obama’s inauguration as the 44th U.S President yesterday may see the U.S currency continue to make substantial gains in the near-term with long-term trend support targeted at $1.3682.
A firm breach of this support level would signal a further decline towards $1.3045, the lowest level since 1985, and Dollar buyers may wish to place stop orders around these levels to protect against a prolonged downside move.
The Pound also came under pressure against all of the 16 most actively traded currencies yesterday as a government report showed that the annual pace of inflation slowed to 3.1% in December, the lowest rise in consumer prices since April 2008, giving the Bank of England further scope to cut interest rates next month.
In terms of economic data, the UK currency is unlikely to find much support this morning amid the release of the minutes from the Bank of England’s last policy meeting and a unanimous vote to cut interest rates to 1.5% is expected with investors looking for some insight into the discussions on quantitative easing measures to bolster the economy.
The Euro continued to decline against the Dollar yesterday, dropping under $1.29 by the close of trading last night, but the single currency again took advantage of broad sterling weakness as German investor confidence improved more than initial forecasts in January.
The ZEW centre for European Economic Research said that its index of investor and analyst expectations rose to a reading of minus 31 from minus 45.2 in December, its third successive increase, after the ECB cut interest rates to 2.5% in the same month and announced a second spending package to combat the recession.
Policy makers within the Central Bank continued easing borrowing costs in January but the Pound’s rally against the Euro was curtailed after the ECB President indicated that the governing council would slow the pace of interest rate reductions with the next significant meeting in March.
Data Released 21st January
U.K 09:30 Claimant Count Unemployment (December)
U.K 09:30 Average Earnings (3 Mths to November)
U.K 09:30 BoE Monetary Policy Committee Minutes (7/8th Jan Meeting)
U.K 09:30 PSNCR (December)
U.S 18:00 NAHB Housing Market Index (January)
written by Adam Solomon
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