The Pound rallied for a third consecutive day against the Dollar yesterday, while the UK currency also climbed above 1.0800 versus the Euro as renewed optimism for banking stocks swept through the market after Citigroup Inc recommended buying Lloyds Group Plc shares and eased concerns about the government’s role in rescuing lenders.
Despite the dire tone of recent housing number and reports from the International Monetary Fund that the UK economy is the most susceptible to the global crisis, the Pound rose to its highest level against the Dollar in more than a month amid a renewed appetite for risk as the UK FTSE 100 index gained 13% on the day.
Shares in Barclays Plc have rallied another 31% in London trading today after a statement earlier this week said that the struggling bank won’t need any further capital increases because revenue increased substantially last year following the acquisition of assets from the collapse of Lehman Brothers Holdings Inc.
The statement from Citigroup Inc also highlighted that the prospect of nationalisation of UK banks has been “exaggerated”, while billionaire investor George Soros also said yesterday that he is no longer betting on the Pound’s decline and that provides some optimism that the UK currency may have reached a near-term bottom.
At the World Economic Forum in Davos, Switzerland Soros said that he foresaw the fall in Sterling last week but below $1.4000, the risk-reward ratio was no longer clear as the Pound dropped to a low of $1.3505, the lowest level since 1985.
The correlation between stock market volatility and the Pound’s performance against the majors has become increasingly prevalent in the recent weeks and the UK currency strengthened 1.4% against the Dollar to a high of 1.4375 before the FOMC rate announcement last night.
The Pound also appreciated 0.8% against the Euro despite reports from the IMF that the UK economy will contract 2.8% in 2009, more than any of the other Group of Seven industrialised nations, while the global slump will continue this year as more than $2 trillion of bad U.S assets will continue to curtail the pace of economic growth.
The statement from the International Monetary Fund is in stark contrast to recent comments from the UK Prime Minister Gordon Brown who has maintained throughout this crisis that Britain is in a better position to deal with the slump but his efforts to stabilise the economy were met with cynicism by the opposition leader David Cameron yesterday.
Brown conceded yesterday that the UK is entering a “deeper recession” than first feared and declared that the government will act to soften the effect, suggesting that he may consider yet another fiscal stimulus package as previous injections of capital and the most aggressive policy easing in history has done little to raise sentiment.
The Bank of England are likely to buy assets and print money within the next six months as the UK Treasury works to rescue the economy that has been ravaged by possibly the worst recession since the end of the Second World War, while the Chancellor Alistair Darling may add to the £20 billion stimulus program of tax cuts and spending increases.
The Euro declined against both the Pound and the Dollar yesterday despite a statement from the ECB President Jean-Claude Trichet said that the Central Bank’s next “important” meeting will be in March, suggesting that policy makers will refrain from cutting rates next month while the BoE look to cut by another projected 50 basis points.
The ECB’s governing council has been forced into the most aggressive period of monetary easing in its 10-year history after the global financial crisis pushed the Euro-zone economy into a deeper recession but Trichet has still signalled his reluctance to bring rates below the 2.0% ceiling and following the Fed in reducing borrowing costs to zero.
However, markets are still looking at the dire tone of European economic data and the dramatic fall in fundamentals is forcing policy makers to look at less conventional techniques to revive the economy with the German coalition introducing the biggest fiscal stimulus package since the end of World War Two.
The Central Bank’s reluctance to lower interest rates in February is hurting the Euro according to a report from the Royal Bank of Scotland Plc as the single currency fell 0.4% versus the Dollar amid suggestions that the Euro-zone are behind the curve in an economic recovery.
In terms of economic data, the ECB came under further pressure to continue the pace of monetary easing after Germany’s annual inflation rate unexpectedly dropped to a the lowest level in almost five-years in January after the harmonised index of consumer prices declined to 0.9% on the month.
The ECB currently has the highest interest rate among the Group of Seven nation as the Fed, the Bank of England and the Swiss Central Bank have cut rates by more as the world’s largest economies slide simultaneously into a recession for the first time in over 60-years.
The Dollar and the Yen weakened again against the majors yesterday, both dropping to a one-weel low versus the Euro amid speculation that the U.S plan to set up a bank to contain all toxic debt will reduce the demand for safe haven currencies and revive market sentiment.
The U.S House of Representatives is preparing today to approve Barack Obama’s historic $816 billion economic stimulus package aimed ay bringing the economy out a recession through a combination of tax cuts and a $604 billion spending bill that is designed to revive consumer spending.
Data Released 29th January
U.K 07:00 Nationwide House Prices (January)
GER 09:00 Unemployment Rate (January)
EU 09:00 M3 / 3 Month Moving Average (December)
EU 10:00 EC Business Climate Index (January)
EU 10:00 EC Economic Sentiment (January)
- Consumer / Industrial / Services
U.S 13:30 Durable Goods (December)
U.S 13:30 Jobless Claims (w/e 24th January)
U.S 15:00 New Home Sales (December)
written by Adam Solomon
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