The Pound plunged close to its lowest level in over a week against the Euro yesterday, while the UK currency also recorded further losses against the Dollar, amid reports that UK house price declines will persist until 2012. The National Institute of Economic and Social Research said that house prices will decline as the economy continues the shrink until the fourth quarter.
Home values will resume their decline because recent gains were driven by a fundamental lack of homes on the market, while the number of mortgages remains 65% lower than before the financial crisis. The NIESR also anticipates falling home values will hurt consumer spending and gross domestic product will keep falling until the fourth quarter.
Simon Kirby, an economist at NIESR, said yesterday that “there has been talk of stabilisation and some recovery in the housing market, but we don’t think this is the case. We only see growth in the housing market returning in 2012.” The Bank of England confirmed this week that mortgage lending may strengthen over the coming months, while the Nationwide Building Society said that house prices increased in June.
Despite speculation that growth will return later this year, the economy has yet to emerge from the recession, after contracting the most since 1958 in the first quarter. Falling house prices and rising unemployment will curtail the pace of consumer spending in the next two years and encourage an increase in the household savings ratio to the highest level since 1997.
Government borrowing is expected to peak at 12% of GDP in the fiscal year ending March 2010, or 165.7 billion, before shrinking to 7.5% of the economy, or £121.6 billion. That’s still way in excess of the Chancellors forecast in April, suggesting that tax increases, spending cuts and longer working lives may be needed to repair the public finances.
The Pound fell to a low of $1.63 against the Dollar in London, as the FTSE 350 Banks Index lost as much as 1.5%, following reports in the Daily Telegraph that Barclays Plc and Royal Bank of Scotland Group Plc will require additional funding. UK stocks rebounded from earlier losses, with the benchmark FTSE 100 Index rising 0.4%, after U.S home prices unexpectedly rose in May.
The revival in risk appetite provided some underlying support to the Pound and the UK currency rose higher through the course of the day, amid reduced demand for the relative security of lower-yielding assets. Gilts fell and the Pound rallied after the minutes from the Bank of England’s last policy meeting showed that policy makers voted unanimously against boosting asset purchases.
The nine member monetary policy committee, led by the governor Mervyn King, kept the benchmark interest rate unchanged at a record low of 0.5% and said that there was no clear evidence to support an increase in their asset-insurance program, as the risks to the economy had probably diminished. However, the accompanying statement also indicated that policy makers will review the size of the money-printing plan in light of new economic forecasts in August.
The Pound had been under severe selling pressure amid speculation that policy makers would increase its quantitative easing program beyond £125 billion in order to revive lending conditions. The minutes said that “little evidence has emerged since May to change the committee’s views about the broad shape of the prospects for the economy in the medium term, although the downside risks to gross domestic product in the near-term had probably diminished.”
Policy makers didn’t allude to investor expectations for an increase in the size of the plan, which led to a sell-off in government bonds after the July decision to keep it unchanged. While recent economic data has indicated that the housing slump may have eased and the recession has shown some signs of moderating, a recovery has yet to become entrenched in the economy.
Nick Kounis, an economist at Fortis Bank, said that “their communication leading up to the meeting was not all it should have been because expectation in the market was that they would extend it. The minutes are consistent with the idea they’re edging towards stopping the program or staying with the current level of purchases. They sound more optimistic on the economy.”
The Pound rose against the Dollar after the release of the minutes, rising to a high of $1.65 during Asian trading. Euro and Dollar buyers would still be well position to work a stop order in the market to protect against a sudden downward move because there is still a possibility that policy makers will extend the program in August if economic indicators point to a worsening slump.
The UK inflation rate dropped in June below the Bank of England’s 2% target for the first time since September 2007, as the recession sapped price pressure in the economy. Consumer prices rose just 1.8% from a year earlier, sparking concerns over deflation and diminishing the prospect over a near-term increase in borrowing costs.
Elsewhere, a UK index of manufacturing orders deteriorated in July to the worst level in 17-years, as the recession curtailed demand for British-based goods. The report from the Confederation of British Industry showed that a gauge of factory orders fell to minus 59, the weakest reading since January 1992. The report suggests that a weaker Pound has yet to bolster factory production, as the UK slowly recovers from the worst recession in a generation.
EUR/USD
The improvement in risk appetite hampered Dollar sentiment yesterday, as the U.S currency remain trapped in a relatively narrow range against the Euro, circulating around the $1.42 level. The European economic data was weaker-than-expected with a further small monthly decline in industrial orders, as the worst recession in sixty-years sapped demand for exports.
Companies across the Euro-zone have halted business investment, hurting orders for capital goods, and cut jobs to cope with the worldwide economic slump. However, there are still signs that the economy is stabilising, after contracting by a record in the first quarter. Governments worldwide have announced about $2 trillion in economic stimulus programs, including packages to spur industrial orders.
The reported Morgan Stanley losses together with a warning from Wells Fargo over an increase in bad-debt provisions unsettled confidence to some extent, which initially triggered some defensive demand for the Dollar. The U.S currency was unable to gain any momentum and failed to mount a significant rally on Euro support levels in the $1.41 region.
Data Released 23rd July
EU 09:00 Current Account (May)
U.K 09:30 Retail Sales (June)
U.S 13:30 Initial Jobless Claims (w/e 18th July)
U.S 15:00 Existing Home Sales (June)
written by Adam Solomon
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