The Pound remained very weak in early trade yesterday, dropping under $1.4200 against the Dollar and falling to a low of 1.1134 versus the Euro, as escalating fears over the UK banking sector intensified, following the severe annual losses at the Royal Bank of Scotland Group Plc.
Nevertheless, confidence in the banking sector was supported to some extent by the government’s plans to provide additional protection to struggling financial institutions, effectively easing the pressure from bad loans and toxic debt in a government supported insurance scheme.
RBS Plc will put £325 billion of investments into a state insurance program and shift toxic assets to a new unit after Britain’s biggest government owned bank posted the largest loss in British history. The struggling bank will transfer roughly £540 billion of assets, including derivatives and loans on commercial and residential property to the new unit, mirroring the actions taken by Citigroup Inc in creating a ‘bad bank’.
Following the reports, the share price in RBS and Lloyds Banking Group Plc rose more than 25% in London, as the government provided a bigger guarantee than initial estimates. The Prime Minister Gordon Brown has agreed to insure the distressed banks in an attempt to boost capital that will ultimately spur lending and bolster the economy.
The steps taken by the government yesterday is the latest indication that the Chancellor Alistair Darling is closer towards nationalising UK banks, as the Treasury allows its stake in RBS Plc to climb to 84% in return for guaranteeing £325 billion in toxic assets. The government are desperate to get banks lending again as the economy suffers its worst recession since the 1980s, while Darling will also want to keep some private ownership of RBS Plc and other banks.
The renewed optimism that the banking sector will stabilise saw the Pound recover some gains against the majors, rising to a high of $1.4380 by the close of trading last night. The near-term sentiment for the Pound will be influenced strongly by the trends in domestic banking and the aggressive swings in risk appetite that saw lower U.S equities trigger modest Sterling losses in New York.
In terms of economic data, the UK home values fell by the most in at least 18-years in February, as the pessimism in the banking sector and a worsening economic climate led to a restriction in mortgage finance, according to a report from the Nationwide Building Society.
The average cost of a home in Britain fell an annual 17.6% to £147,746, the biggest drop since the monthly data began in 1991, while home values slumped 1.8% on the month amid the biggest economic contraction since 1980.
The Euro is stuck in a tight trading range against the Dollar and once again failed to break above the key resistance at $1.2810, while the single currency retraced back towards 1.1250 versus the Pound, after the EC sentiment index showed that economic confidence had slipped to the lowest level on record in February.
Tighter lending restrictions and rising unemployment is putting increased pressure on the European Central Bank to step up its response to the financial crisis. An index of consumer sentiment plunged to a reading of 65.4 this month, as lending to households and companies slowed by the most in over five years.
European retail sales declined and the jobless rate in Germany rose for a fourth straight month as the tone of yesterday’s data dashed any hope of stabilisation in the economy. The reports also increased speculation that the Central Bank will cut interest rates by 50 basis points in March, with a further protracted cut in April.
The Dollar is very susceptible to swings in risk sentiment and that is a theme that is likely to continue in the short-to-medium term but the U.S currency also came under some pressure yesterday after a barrage of weaker economic data pointed to a worsening recession.
New home sales plummeted to a record low in January, as soaring unemployment and rising foreclosures discouraged buyers, with purchases falling 10% to an annual pace of 309,000, the lowest level since the data was compiled in 1963.
Elsewhere, U.S durable goods orders declined for a sixth straight month in January, signaling that companies are slashing jobs and corporate investment, while initial jobless claims for unemployment benefits unexpectedly rose to a record high last week.
Data released 27th February.
EU 10:00 Final Harmonised Index Consumer Prices (January)
EU 10:00 Unemployment (January)
U.S 13:30 Gross Domestic Product (Q4)
U.S 13:30 Chicago PMI (February)
U.S 14:55 Michigan Sentiment (February Final)
written by Adam Solomon
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