Another remarkable week in financial markets saw the Pound plunge almost 10% against the Dollar, while the UK currency also dropped to a fresh record low versus the Euro amid stories of suspended trading on stock, hedge funds in chaos and the prospects of another coordinated round of interest rate cuts.
The fear and panic gripping global markets shows few signs of abating as traders and investors are forced to liquidate positions in equities, commodities and high-yielding currencies amid mounting evidence that the global economy was heading for a prolonged recession.
As a result, traders look set to remain on high alert over the coming days as the momentous fall in stocks combined with the uncertain trading environment continued to favour ‘defensive’ currencies like the Japanese Yen, the U.S Dollar and the Swiss Franc.
The unquenchable rise in risk aversion continued to weigh heavily on Sterling sentiment as the Pound fell below $1.5300 at one point on Friday, to record the biggest weekly decline since ‘Black Wednesday’ in 1992, while the UK currency also slipped towards 1.2200 versus the Euro amid a barrage of weakening economic reports.
Official figures on Friday showed that UK gross domestic product dropped 0.5% from the second quarter, more than double initial forecasts, and indicated that the financial crisis has heavily affected industries from banking through to construction as the economy enters its first recession since 1991.
The report from the Official of National Statistics was the catalyst for a yet another decline in UK stocks as the FTSE 100 index lost a further 5% on the session, while the Pound suffered its sharpest intraday drop against the Dollar in at least 37-years as the report supported the Prime Minister’s damning assessment on the outlook for growth.
Gordon Brown’s £500 billion injection of emergency funding, combined with the Bank of England’s 50 basis point interest rate cut has thus far done little to bring a sense of stability and calm back to the market and there are real concerns that the biggest rate reduction since 2001 has come too late to prevent a recession.
The subsequent reaction to the report may indicate that the BoE will need to implement another rate cut in November as BNP Paribas predict a full percentage point reduction from the current 4.5% and the increased appetite for lower yielding assets may see the Pound come under renewed selling pressure in the near-term.
Bank of America Corp and JP Morgan Chase & Co have both forecast a 75 basis point cut on the November 6th announcement despite the BoE not cutting by more than half a point since the Central Bank started setting interest rates after Labour came to power in 1997.
The historic level of volatility sweeping through financial markets saw the Pound trade at $1.5269 on Friday, the lowest since August 2002, before bouncing back towards $1.5900 at the close, while the Pound also came back from a record low against the Euro after declining 2.5% in just a week.
The collapse in credit markets and the worst housing slump in a generation have buffeted the government’s efforts to restore confidence to the market and the figures on Friday only weigh in to the argument that the UK economy has already entered a recession , while growth is expected to contract for the next three quarters.
The decline in Sterling was reminiscent of the moves seen in September 1992 after the then Prime Minister John Major pulled the currency out of the Exchange Rate Mechanism but Friday’s drop was the largest since 1971, when former U.S President Richard Nixon ended the global fixed exchange rate regime set up at the Bretton Woods conference at the end of the Second World War.
The so-called safe haven currencies are likely to remain the most attractive commodity to investors over the coming week as the Yen also rose 15 % in value against the Sterling last week and the increased appetite for risk aversion may see the Pound slip inevitably towards the 1.40 levels versus the Dollar.
Although the Euro took advantage of broad Sterling weakness last week, the single currency continues to look vulnerable against a basket of currencies, registering the steepest weekly loss versus the Dollar since the Euro’s introduction in 1999.
Amid a packed week of Euro-zone data, the single currency could again struggle to stem the losses with the German Ifo sentiment index expected to show confidence slipped again, while the flash estimate of consumer prices may show that inflation is trending downwards, giving policy makers the scope to continue lowering interest rates.
The U.S currency gained the most in 16-years against six of the major currencies and rallied an incredible 6% versus the Euro to touch the highest level in two years at 1.2616 as the global economic slump helped demand for the Dollar as a relative safe haven from losses in emerging markets.
The unrelenting increase in appetite for Dollar denominated assets comes despite the plunge in the U.S stock market last week as the Standard & Poor’s Index dropped 6.8% on the week, while the Dow Jones Industrial Average also fell 5.4% amid suggestions that trading would be suspended amid historic levels of volatility.
Nevertheless, the dwindling sentiment surrounding stocks has failed to curtail the Dollar’s momentum and the U.S currency may again stand firm as the Federal Reserve convenes this Wednesday and the futures market has gone from pricing in a quarter percentage point cut to look for a 50 basis point reduction.
Data Released 27th October
GER 09:00 Ifo Index (October)
EU 09:00 M3 / 3 Month Moving Average (September)
U.S 15:00 New Homes (September)
written by Adam Solomon
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