The Pound enjoyed a significant intraday rally against the Dollar yesterday, rising as high $1.5247 on the session, before falling back under $1.5000 at the close of trading last night, while the UK currency also met resistance just under 1.2000 versus the Euro following the release of the minutes from the BoE’s last policy meeting.
The Bank’s monetary policy committee slashed UK interest rates by 1.5% earlier this month and the report yesterday indicated that policy makers are willing to cut rates again in an attempt to revive the struggling economy.
There is a growing sense that the Central Bank acknowledge they are well behind the curve on monetary policy and policy makers are ready to be more aggressive in addressing the risks to economic growth as the minutes showed that the MPC even considered a larger reduction in November.
In the aftermath of the report, the Pound remained largely unchanged but through the session the UK currency began to make gains against the majors, climbing 2% versus the Dollar and investors are still adamant that sellers of Sterling should take advantage of the mini revival with further losses likely to come.
According to the minutes, policy makers led by the governor of the Bank of England Mervyn King, discussed the possibility of lowering rates below 2.5% before the MPC voted unanimously to reduce borrowing costs to 3.0%, the lowest level since 1955.
Policy makers limited the reduction to 150 basis points because they wanted to wait for details on the government’s tax plans and assess the effects of the state rescue of a number of struggling financial institutions before another projected 50 basis point cut on December 4th.
A report from the Office of National Statistics earlier this week showed that the annual pace of UK inflation recorded the biggest single drop in at least 11-years last month as the economy contracted and Mervyn King conceded just last week that the Central Bank is prepared to cut rates and prevent deflation from taking hold.
The minutes from the report showed that projections in the UK inflation rate implied that a significant reduction in the lending rate, possibly in excess of 200 basis points, might be required in order to meet the 2.0% inflation target in the medium term.
Consumer prices have risen 4.5% year-on-year in October, compared with 5.2% the previous month and the significant drop has fuelled concerns that a slowing economy will see the economy enter a period of deflation as producer costs also tumble and output prices contract at the fastest pace in 22-years.
Some would argue that policy makers are actively trying to undermine confidence in Sterling as a weaker currency will help bolster growth but MPC member Timothy Besley said yesterday that the weakness in the Pound probably won’t prevent inflation from slipping under the 2% target next year.
The Euro declined on the session against the Pound yesterday but enjoyed a strong intraday move versus the Dollar despite a fairly damning assessment from the ECB President Jean-Claude Trichet, who said that the global economy is experiencing the worst financial crisis since the end of World War Two.
Europe’s economy has fallen in its first recession in 15-years in the third quarter of this year after the credit crisis pushed up lending costs and triggered the collapse of the third largest U.S investment bank Lehman Brothers Plc in what could be considered the worst financial crisis since the Great Depression.
The European Central Bank have lowered interest rates to 3.25% over the past month and the Euro’s momentum against the Pound has stalled amid speculation that the Central Bank will be just as aggressive as the Bank of England in lowering borrowing costs.
The Dollar came under a large degree of selling pressure yesterday as the U.S currency extended its decline against the Pound following reports that U.S consumer prices fell at the fastest pace on record as the cost of living fell and construction began on the fewest number of homes ever last month.
The currency market has been dominated by swings in risk sentiment in recent weeks but yesterday U.S fundamentals came back into focus as the headline consumer price index plunged 1.0% in October, the most since records began in 1947.
The scale of the decline indicates a period of deflation, or a prolonged price slide, which may become another hazard facing the Federal Reserve and that could worsen the economic outlook by making debts harder to pay off and offsetting the positive impact of a series of interest rate cuts.
Data Released 20th November
GER 07:00 Producer Price Index (October)
U.K 09:30 Retail Sales (October)
U.K 09:30 PSNCR (October)
U.S 13:30 Initial Jobless Claims (w/e 14th November)
U.S 15:00 Leading Indicators (October)
U.S 15:00 Philly Fed Business Survey (November)
written by Adam Solomon
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