Following on from last week, the Pound endured another turbulent week against the majors with the UK currency unable to sustain any positive momentum versus the Euro and the Dollar as a sense of risk aversion stalked the market and speculation grew over the prospect of another UK interest rate cut in December.
Nevertheless, the Pound at least stemmed the flow of losses amid suggestions that the Bank of England’s aggressive easing in borrowing costs will eventually enable the UK economy to emerge faster from a recession than initially anticipated.
The UK currency snapped two weeks of declines after the governor of the BoE Mervyn King indicated that interest rates will be cut again from the current 3.0%, the lowest level since 1955, and traders are already speculating on another 75 basis point reduction on December 4th.
The degree of negative data in the UK suggests that the economy is in the grip of a recession that will probably last until 2010 as a fundamental drop in consumer spending and rising unemployment is making it harder for the government to stimulate growth, while the ongoing financial crisis means that bank’s are unwilling to increase lending.
Nevertheless, the Pound actually rallied 0.5% against the Dollar on Friday and briefly rose above 1.1900 versus the Euro despite the release of the minutes from the Bank’s last policy meeting, which showed that policy makers even considered a bigger reduction in November.
Central Banks worldwide are discussing deeper reductions in borrowing costs as the global economy stumbles through a recession and Federal Reserve policy makers predicted last week that the U.S economy will contract through mid 2009, with some members expressing willingness cut interest rates below the current 1%.
A report from the UK Office of National Statistics last week showed that consumer prices rose just 4.5% year-on-year in October, down from 5.2% the previous month, while a separate index of UK retail sales showed that consumer spending shrank 0.1% over the same period.
Both reports were largely better than initial forecasts but sales contracted for the second consecutive month and the UK inflation rate is still well above the government’s 2.0% target but the larger-than-expected drop in consumer costs will give policy makers further scope to cut interest rates in the months ahead.
Elsewhere, UK home repossessions by mortgage lenders rose 12% in the official figures for the third quarter as higher unemployment and shrinking economic growth left an increasing number of home owners unable to pay their debts.
Foreclosures increased to 11,300, compared to 10,100 in the three months through June as the Council of Mortgage Lenders, which represents British home loan providers said that applications to foreclose increased 9% and repossession orders jumped 24%.
The Pound’s trade weighted index rose 0.7% in the past week, according to indexes compiled by Deutsche Bank AG and the world’s largest currency trader predicts that the Pound will head lower against the Dollar this week but the UK currency could make some gains against the Euro with resistance at 1.1992.
Ongoing financial market turmoil, global recessionary concerns and year end factors should all influence market direction this week, while activity level should be interrupted by the Thanksgiving holiday in the U.S and the Chancellor’s pre-budget report this afternoon.
The Pound may find support should the government announce changes to the tax regime that would make repatriating overseas earnings a far more attractive option for UK companies and boost consumer sentiment.
The Chancellor Alistair Darling has the scope to cut value added tax by 2.5 percentage points to the lowest level allowed by the European Union and initial estimates show that the move will cost the treasury roughly £12 billion.
In Europe, there will also be a focus on the scope for a fiscal stimulus response to the deepening economic crisis as the EU is poised to announce the details of an “Economic Regeneration Package” early this week.
Euro-zone fundamentals will probably point to further downside risks to growth in the Euro-region and the single currency may come under further selling pressure against the majors amid suggestions that the ECB will cut interest rates more aggressively that the Bank of England.
The Dollar recorded a third weekly gain against the Euro as a plunge in global stocks increased demand for the security of U.S government debt, while higher-yielding assets such as the New Zealand and Australian Dollar declined heavily amid volatile swings in risk sentiment.
However, the weakening tone of U.S economic data suggests that the U.S recession probably deepened as consumer spending plummeted in October by the most since 2001, while the downturn in business investment saw purchases decline 1% after 0.3% fall the previous month.
The ongoing financial crisis has forced cash strapped consumers to rein in spending, while companies have cut purchases and slashed jobs as the manufacturing sector deteriorates along with housing and service sector growth to indicate that the economy is sinker further into what may be the most severe economic slump in decades.
The Dollar may weaken against the Euro this week and come under some pressure versus the Pound as speculation over a further cut in U.S interest rates will encourage foreign investors to seek higher returns elsewhere, while a barrage of weak economic reports will continue to undermine confidence in the economy.
Data Released 24th November
U.K 15:30 Chancellor Presents Pre-Budget Report
EU 10:00 Industrial Orders (September)
GER 09:00 Ifo Index (November)
U.S 15:00 Existing Home Sales (October)
written by Adam Solomon
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