The Pound was unable to sustain the surprising upside momentum against the Dollar from Wednesday as the UK currency relinquished all of the previous day’s gains, falling back under $1.4700 against the Dollar, and not even a smaller-than-expected drop in UK retail sale could limit the decline.
The UK currency also declined by the most in a week versus the Euro, falling to a low of 1.1764 by the close of the European session, as government bonds surged higher and a report from the Office of National Statistics showed that UK retail sales fell for a second consecutive month.
The 0.1% decline in like-for-like sales only served to increase the likelihood that policy makers will cut borrowing costs aggressively in December in an attempt to revive the floundering UK economy as it stumbles through possibly the worst recession since the end of the Second World War.
Nevertheless, the drop in sales was actually less than initial forecasts as shoppers stepped up food shopping in preparation for Christmas and that offset the lower spending on electrical goods and clothing.
Earlier predictions had forecasted that sales would tumble 0.9% from September and it was perhaps a little surprising that Sterling failed to find any support from the figure and continued the downside momentum as Marks & Spencer Group Plc warned that the current business climate is the toughest since the early 1990s.
Therefore, economists expect consumer spending to get a lot worse and rising unemployment will make it difficult for the government to revive growth even as it implements further cuts in borrowing costs and provides tax breaks to low income earners.
The recent rhetoric from a number of BoE policy makers, including the governor Mervyn King, has signalled that the Central Bank even considered cutting the benchmark lending rate below 2.5% in November before a unanimous decision to reduce rates to 3.0%, the lowest level since 1955.
Gains by government bonds subsequently pushed the yield on the two-year gilt to the lowest level in at least 16-years and the worsening economic outlook is likely to weigh heavily on Sterling over the coming months with a number of economists predicting widespread losses for Sterling against a basket of currencies.
The degree of negative sentiment for the Pound was perfectly illustrated in a recent forecast by JP Morgan & Chase Co who said that Sterling will hit $1.2800 versus the Dollar by Spring 2009, while dropping below 1.1000 against the Euro.
Nevertheless, it is not just the Bank of England that are stepping up an aggressive period of monetary easing as Central Bank’s around the world discuss deeper reductions amid a worldwide recession that has been brought about by the worst financial crisis since the Great Depression.
However, there are growing concerns that the UK economy will be unable to spend its way out of a recession and considering that manufacturing only contributes to roughly 15% of gross domestic product, it is becoming increasingly difficult to see a solution, particularly with housing and services in a downward spiral.
As a result, the Pound may drop as low as $1.4500 over the next week and that trend may also continue against the Euro as we approach the all time record low under 1.1600 with a further 50 basis point interest rate cut scheduled for December.
UK stocks also plummeted for a second consecutive day as a record number of U.S jobless claims sparked fears that the global recession is deepening and the Dollar also fell against the Euro as traders speculated that the Senate’s plan to bailout automakers will reduce demand for the security of U.S assets.
The Japanese Yen fell against the Euro and the Dollar as U.S stocks erased earlier losses and encouraged speculation that investors will halt the sale of high-yielding currencies funded by low cost loans in Japan.
That sentiment was emphasised in the performance of the Swiss Franc, which is also considered a ‘safe haven’ asset, as the currency decreased to the lowest level against the Dollar since July 2007 after the Central Bank unexpectedly halved its target lending rate to 1.0%.
However, the Australian and New Zealand Dollar, along with the Canadian Dollar also came under renewed selling pressure against the Pound as the increased appetite for risk aversion still stalks the market.
Concerns over the future of U.S automakers saw the Dollar decline 0.4% versus the Euro as senators reached a bipartisan agreement on a bailout plan that may yet fail to find majority support in Congress.
Elsewhere, initial jobless claims in the U.S climbed to a higher-than-expected 542,000 in the last week as the number of Americans filing for unemployment benefits approached the highest level in 26-years and that reflects the worsening economic outlook.
In addition, an index of leading economic indicators that is used to gauge the future performance of the economy declined 0.8%, while a measure of manufacturing in the Philadelphia region sank to an 18-year low and the reports combined show that the U.S economy is in the midst of a recession that may spark a period of deflation.
Data Released 21st September
EU 09:00 Flash PMI – Manufacturing (November)
– Services
written by Adam Solomon
Related posts:
- The Pound rallies to a three week high against the Dollar as UK retail sales declined by less than forecast
- The Dollar declines to a fresh record low against the Euro amid news that U.S retail sales unexpectedly declined in February
- The Pound declines heavily against the majors after UK manufacturing contracts for the sixth consecutive month in October
- The Pound remains largely unchanged despite UK unemployment falling for the second consecutive month in August
- The Dollar falls as the the Federal Reserve elect to hold interest rates at 5.25% for the third consecutive month
