The Pound resumed the upside momentum against the Dollar yesterday while the UK currency also rallied higher versus the Euro after Bank of England policy maker Andrew Sentence said that the MPC must temper its response to the financial crisis and focus on the inflation mandate.
Policy makers have faced a difficult balancing act in recent months, balancing the upside threat of inflation against the looming threat of a recession but in a speech yesterday, Sentence warned that “allowing the economic slowdown to develop into a deflationary spiral” would not help achieve the government’s 2.0% target.
The Pound climbed to a high of $1.8658 versus the Dollar in early trade yesterday as the market tentatively approaches the Fibonacci retracement level above 1.8700 despite an increased probability that the Bank of England will lower interest rates in its October meeting.
Investors are betting on an 85% chance of a reduction in October, from 60% on Tuesday and just 45% this time last week, according to Credit Suisse Group’s index of derivatives.
The 30% drop in oil prices has yet to feed through to the broader economy and interest rates have unchanged at 5.0% since April but concerns that the mounting bank losses will push the economy into a recession may mean that that MPC has little choice but to begin an aggressive period of easing.
The escalating financial crisis may see unemployment rise by as much as 0.4% this month, which translates as roughly 125,000 people losing their jobs while the same article in the Guardian newspaper also highlighted that slowing growth may cause inflation to undershoot the 2.0% target.
The declining sentiment surrounding the outlook for the Euro-zone continued yesterday German consumer confidence unexpectedly rose for the first time in five months after falling fuel costs left people with more to spend of food and clothing.
The price of oil has fallen almost a third from its record high in July but at more than $100 a barrel, the cost still remains 30% from a year ago and that is eroding consumer’s spending power.
The Euro recorded sharp intraday losses against the Pound yesterday but the single currency continues to benefit from broad Dollar weakness as the focus this morning falls on the M3 index of money supply, which is forecasted to decline 0.3% in August.
The declining appetite for the Dollar continued yesterday as the U.S currency fell across the board after the U.S President George W Bush said that the economy may a “painful” recession over the coming as traders bet on a Fed interest rate cut next month.
The Dollar has struggled to revive sentiment since the events of last week and the U.S currency may continue to struggle today as a government report is expected to show that home sales dropped in August, extending the worst decline in housing for 17-years.
Data Released 25th September
GER 07:00 Gfk Consumer Confidence (October)
EU 09:00 M3 – Money Supply (August)
– 3 Month Moving Average
U.S 13:30 Durable Goods Orders (August)
U.S 13:30 Initial Jobless Claims (w/e 19th September)
U.S 15:00 New Home Sales (August)
written by Adam Solomon
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