The Pound declined to the lowest level in almost five years against the Dollar yesterday, while the UK currency also slumped to a near all-time low versus the Euro following reports that UK house prices dropped by the most in since records began in 2001 and UK stocks continued the downward momentum built up from last week.
The FTSE 100 Index fell to the lowest level in five years, led by a decline oil service companies and commodities producers, as crude oil prices retreated to the May 2007 low amid concerns that a global recession will slash fuel consumption.
UK stocks lost a further 0.8% on the session after earlier falling as much as 5.6% at the open and the index has now slid 21% so far in October on concerns that a global slowdown will curb corporate profits, while the decline in stocks has coincided with the slump in Sterling, which has now fallen over 12% against the Dollar in October alone.
According to a report from Hometrack Ltd, property prices fell the most in at least seven years this month as the average cost of a home in Britain slipped 7.3% to £163,200 and prices will keep declining over the coming months as the economy deteriorates and edges closer towards a recession.
The seizure in global credit markets has made banks and lenders reluctant to lend and the subsequent reaction on consumer spending saw economic growth slip into negative territory for the second successive quarter in the three months through September, while unemployment has climbed by the most in over two years.
The heightened expectations of a forthcoming recession combined with the rising jobless rate will continue to undermine demand for housing and the London based research group said that ‘continued price falls are inevitable’ over the coming months.
UK house prices are expected to decline by 25% by the end of next year from the highest point in the third quarter of 2007, while the Centre for Economic and Business Research said in a separate statement that prices will come back towards the 2004 levels.
The Pound subsequently fell for the seventh consecutive day against the Dollar, trading at a low of $1.5280 earlier in the session before bouncing back towards $1.5600 at the close of trading last night but the general consensus suggests that a 1% drop in UK interest rates could bring the Pound down to the 1.4000 levels.
The UK economy contracted 0.5% in the third quarter in the official statistics released last week as the decline in housing is accompanied by a downturn in services and manufacturing, while speculation continues to mount that the Bank of England could reduce borrowing costs aggressively on November 6th.
The former chairman of the Financial Services Authority Howard Davies concurred with that sentiment, saying yesterday that the Bank of England may need to consider lowering its benchmark interest rate by a full percentage point as the turmoil sweeping through financial markets shows few signs of abating.
The heightened speculation surrounding the rate announcement has continued to weigh on Sterling sentiment as the Pound declined against 14 out of the 16 most actively traded currencies, while the rising appetite for risk aversion means that the higher yielding currencies will continue to struggle as investors seek the security of the U.S Dollar and Japanese Yen.
BNP Paribas have recently altered their predictions to reflect a 100 basis point reduction and yesterday Goldman Sachs Group Inc also said that the Central Bank will bring borrowing costs down to 3.5% next month in a last ditch attempt to bring some stability and confidence back to the banking system.
The Prime Minister Gordon Brown also weighed into the argument yesterday and said that central banks around the world have the scope to reduce interest rates and even indicated in an interview with the BBC that the escalating crisis may warrant another emergency reduction this week after the UK economy contracted by the most since 1990 in the third quarter.
The deteriorating outlook of the global economy has also hurt the Euro in recent weeks as the single currency slips to a fresh two year low versus the Dollar as European stocks continue to slide and business confidence in Germany declines to the lowest level in five years.
The Ifo sentiment index showed that confidence slipped to the lowest since January 1991 as the escalating financial crisis dimmed the outlook for growth, while the report also reiterated that the German economy is struggling to recover from a second quarter contraction and that may force the ECB into action.
The Central Bank President Jean-Claude Trichet said yesterday that policy makers may consider cutting interest rates next week, less than a month after a coordinated 50 basis point reduction that has thus failed to bring stability back to the market.
In a speech in Madrid, Trichet said that he would “consider it possible that the Governing Council would decrease interest rates once again at its next meeting” but he declined to comment on the scale of the reduction.
Data Released 28th October
U.K 11:00 CBI Distributive Trades Survey
U.S 13:00 Case Shiller House Prices (August)
U.S 14:00 Consumer Confidence (October)
written by Adam Solomon
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