Following on from last week, the Pound suffered its biggest weekly decline against the Euro since December 2004 after the much larger-than-forecast interest rate cut by the Bank of England increased concerns that the UK economy is heading for prolonged and deep recession.
The UK currency also posted a weekly drop versus the Dollar after policy makers, led by the governor, Mervyn King, reduced borrowing costs to 3.0% in an unprecedented move to bring interest rates to lowest level since 1955.
The deteriorating credit conditions and alarming weakness in UK fundamentals has led to speculation that growth in the UK economy will drop 1% in 2009 and investors are already expecting further interest rate cuts over the coming months amid suggestions that rates will reach 2.0%.
The global easing of monetary policy is just the latest initiative to stem the impact of the 15-month credit crisis as it inflicts definitive blows to economic growth and inflation but policy makers may be fighting a losing battle as banks struggle to pass on the reductions to households and companies.
However, HBOS Plc and three other banks that share a monopoly of the UK’s mortgage market finally slashed rates on Friday after government ministers urged them to pass on the cut in borrowing costs in an effort to revive the floundering UK property market.
The Royal Bank of Scotland Group Plc, Northern Rock Plc and the Nationwide Building Society also reduced their standard variable rates by 1.5% and it is no coincidence that these particular institutions relented to pressure considering all have agreed to sell stakes to the government.
Reports last week showed that UK service sector growth, which accounts for over two thirds of gross domestic product, fell deeper into negative territory last month, while industrial production and factory output had its longest streak of declines for almost thirty years.
Nevertheless, in the wake of the Central Bank’s 1.5% drop in UK interest rates, the FTSE 100 index advanced for the first time in three days led by an increase in British Airways Plc and Marks & Spencer Group Plc.
Despite some easing in financial market volatility, sentiment is likely to remain tentative over the coming week as risk aversion remains the dominate force in the market with investors focusing on the gloomy outlook for economic growth.
The Veteran’s Day holiday in the U.S on Tuesday may mean that trading gets off to a slow start this week, while investors will also be looking ahead to the weekend’s G-20 financial summit for further direction.
The Pound could struggle to stem the losses against the majors this week as Wednesday’s release of the Bank of England’s latest quarterly inflation report, which should reflect the dovish tone of last week’s policy statement and perhaps give an indication on how much lower rates could go.
Although the Euro has risen sharply against the Pound, the single currency could make further losses versus the Dollar on demand for the so called safe haven assets but with the ECB interest rate decision out of the way, the focus will shift back towards data releases.
The European Central Bank elected to lower interest rates by 50 basis points last week and in the accompanying statement, the chairman Jean-Claude Trichet, reiterated concerns that the Euro-zone economy is heading deeper into a recession.
The preliminary estimates for economic growth in the third quarter should confirm a technical recession with the economy forecast to contract by a further 0.2% and a plethora of ECB speakers are likely to echo the tone of comments at last week’s post meeting press conference.
Elsewhere, European stocks resumed their losses in the aftermath of the policy decision as the cut in rates failed to ease concerns that the economy and corporate earnings will deteriorate going into 2009.
The Dollar may have lost some of its appeal over the past week but the allure of the U.S currency is still strong in an environment of risk aversion where traders look to sell high yielding currencies in favour of low cost loans in Japan.
In terms of economic data, the Dollar also stood firm on Friday despite reports that the U.S unemployment rate rose to the highest level since 1994 as companies slashed payrolls and increased the prospect of the steepest economic decline in at least 30-years.
The rising jobless rate increased 6.5% in October from 6.1% the previous month, while employers cut 240,000 jobs, despite initial forecasts of a 180,000 decline, to register the biggest two-month slide since 2001.
Rising unemployment combined with other signs that the economy contracted last month has put pressure on the new U.S President elect Barack Obama to quickly name his economic team and spur congressional Democrats to announce a second fiscal stimulus package.
In the aftermath of Obama’s historic victory in the U.S Presidential election, U.S stocks and commodity markets declined, while the Dollar also came under some pressure amid suggestions that Democrats have previously allowed the U.S currency to decline in order to prop up the economy.
Data Released 10th November
U.K 09:30 Producer Price Index
– Input
written by Adam Solomon
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- The Pound rallies above 1.2900 versus the Euro despite speculation that the Bank of England will cut interest rates by 50 basis points this week
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