The Pound rallied to a high of $1.5478 versus the Dollar yesterday and the UK currency also reached a high of 1.1953 against the Euro as government bonds rose and sent the 10-year gilt to the lowest level in almost 20-years following a report that UK consumer spending declined by the most since 1995.
The report from the Office of National Statistics confirmed that business investment also slumped, while gross domestic product posted its first quarterly decline in 16-years to match preliminary estimates on October 24th and the UK stock market plunged for the first time in three days.
The UK economy is so heavily reliant on housing and consumer spending that the reports yesterday will only add to recent evidence that growth has slipped deep into contraction and the Chancellor Alistair Darling pledged £20 billion of tax cuts and spending this week to prevent a drop in lending and rising unemployment from exacerbating the recession.
The government and the Bank of England are working together to restore the flow of credit through the economy but the drop in value added tax may not be enough to revive spending because banks and lenders have so far failed to pass on recent interest rate cuts, while lending conditions remain restricted.
Earlier this month, the Office of National Statistics and the Confederation of British Industry announced that that UK retail sales had declined heavily and yesterday Woolworths Plc, the century old UK retailer, will enter administration tonight, according to a report from the BBC.
Elsewhere, a separate report showed that UK industrial production fell by 1.1% in the official figures for the third quarter and factory output also declined 1.3% to indicate that slump in spending and production will make it increasingly difficult for the government to revive growth.
The Pound declined in the aftermath of the report and endured a volatile session against the major currencies but the Bank of England Deputy Governor Charles Bean said on Tuesday that the Pound’s slide this year is the “right sort of magnitude” as the decline in value is necessary as part of the rebalancing process.
Nevertheless, Bean also added that “there is a distinction between a decline in Sterling that is necessary and one where external investors lose faith in the policy framework the UK operates under and that results in pressure on Sterling.
The Bank of England are actively talking down the Pound as Bean’s comments mirror the tone of Mervyn King’s recent statement and Geoffrey Yu, current strategist at UBS AG, said that there is an inherent risk that the Pound will fall further from its current level as the Bank of England continue cutting interest rates from the current 3.0%.
The decline in UK fundamentals illustrates that the UK economy is in a state of contraction and the global recessionary concerns combined with an aggressive easing in UK interest rates has seen the Pound decline 25% in value against the Dollar this year and the UK currency may struggle to build on the positive momentum earlier this week.
A slump in the global economy and roughly $1 trillion of losses and writedowns at financial institutions due to the credit crisis has fuelled demand for the security of government fixed-income this year, while traders have actively sold high-yielding assets as an element of risk aversion invaded the market.
To that end, the Pound may decline towards 1.1500 versus the Euro over the next quarter as interest rate cuts and a deteriorating budget deficit weighs on sentiment, while investors are speculating on the depth of the cuts with policy makers expected to lower the benchmark lending rate to at least 1.5%.
The Euro suffered a strong intraday decline against both the Pound and the Dollar yesterday amid reports that the European Union will announce a coordinated €200 billion financial stimulus package and said that more may be needed to limit the impact of the current financial crisis.
Many regions within the Euro-zone have already fallen into recession, including Germany, but the proposal yesterday is equivalent to 1.5% of European gross domestic product and is the latest initiative in a series of measures to counter the impact of an economic slump that has essentially shut down lending.
In terms of economic data, inflation in Germany dropped by the most since records began 12-years ago after oil prices plunged from the July high of $147.27 a barrel to just $54.23 by the close of trading in New York and the decline in consumer prices will give the ECB scope to reduce interest rates.
The annual rate of inflation fell 1.5% from 2.5% in October and policy makers are set to reduce rates for the third time in almost two months next week in an attempt to revive the economy from its first recession in 15-years.
The focus this morning will fall on the EC economic sentiment index and the Euro may struggle against the majors for a second day as the report is forecasted to show that consumer and business confidence slipped further into negative territory.
The Dollar rallied higher against the Euro for the first time in four days yesterday as drops in US consumer spending, durable goods orders and new home sales painted a fairly gloomy outlook for the world’s largest economy, creating an element risk aversion in the market as investors sought the security of safe haven assets.
The Dollar also rallied against the Pound in the afternoon session, trading as low as $1.5177 in New York as the deepening U.S recession encouraged investors to sell high-yielding assets in favour of low cost loans in Japan.
U.S consumer spending is the biggest contributor to the economy and reports yesterday showed that sales slipped 1% last month, which was more than initial forecasts, while new home sales fell to an annual pace of 433,000, the lowest level in 17-years.
Elsewhere, orders for durable goods slumped a massive 6.2% in October following a 0.2% decline in September to further emphasise the current recessionary concerns in the U.S economy and that prompted the Federal Reserve to commit up to $800 billion in new funding to help unfreeze credit for homebuyers, consumer and small businesses.
Data Released 27th November
U.S Thanksgiving Day Market Holiday
GER 09:00 Unemployment (November)
EU 09:00 M3 / 3 Month Moving Average (October)
EU 10:00 EC Business Climate (November)
EU 10:00 EC Economic Sentiment (November)
– Consumer / Industrial / Services
written by Adam Solomon
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